NYC Focuses on Hedge Funds in Tax Audits of Carried Interest

New York City’s finance arm has stepped up audits of hedge funds and private equity firms, challenging tax arrangements that shield millions in business revenue from city coffers, according to three tax attorneys privy to these closed-door reviews.

The strategy would subject more of a hedge fund’s earnings to a unique local levy, the 4% unincorporated business tax (UBT), by shifting how its expenses and deductions are allocated, the practitioners told Bloomberg Tax. It also revives an audit position the city first asserted in 2011, though suspended a year later after getting pushback from businesses.

The elevated scrutiny comes as ...