Whistleblower Is Key to New York AG Tax Probe on Private Equity Firms

New York state Attorney General Eric Schneiderman’s probe of tax practices at private-equity firms is based on information from a whistleblower, according to a person familiar with the matter.

The information came from someone who approached Mr. Schneiderman’s office between roughly nine months and a year ago, this person said. Under the state’s False Claims Act, the attorney general can investigate alleged fraud against the state based on a whistleblower’s allegations.

The ongoing probe is examining whether partners at private-equity firms changed management fees into investment income to delay and pay less taxes—or avoid taxes altogether. Some private-equity firms use so-called management-fee conversions, while other firms avoid them.

If Mr. Schneiderman files a lawsuit and wins, defendants could be liable for damages of as much as three times the taxes owed. It isn’t clear when he will decide whether or not to proceed with a lawsuit.

At least two other whistleblower claims related to management-fee conversions have been filed with the Internal Revenue Service, which has the authority to pay whistleblowers up to 30% of proceeds collected in large cases. Such whistleblower cases usually take four to seven years to resolve.

Read on.

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