Private equity fund monitoring fees come under fire.

Gregg Polsky, a law professor at the University of North Carolina, took aim at monitoring fees paid to private equity funds by their portfolio companies in an article in Tax Notes magazine in early February.

Polsky is representing a whistleblower who has called some such fees to the IRS’ attention.

The fees are paid under ongoing consulting agreements.

Polsky says either no work is done or the fees exceed what a third party would charge for the same services or they are a percentage of earnings or are paid out to more than one owner in proportion to the ownership interests. The last two features suggest the fees are dividends. Polsky says he and associates examined 229 portfolio companies owned by private equity funds and identified $3.9 billion in questionable monitoring fees paid from 2008 to 2012.

Polsky wrote another article in 2009 criticizing waivers of management fees that he said some private equity funds use to convert ordinary income into capital gains. The IRS is looking into the practice.

by Keith Martin