Some of the biggest private equity firms on Wall Street are under investigation for possible tax avoidance, including Bain Capital, where Mitt Romney made his fortune.

Eric Schneiderman, the Democratic attorney general of New York, is conducting the probe. His office has issued subpoenas to Bain, Kohlberg Kravis Roberts & Company, TPG Capital, Sun Capital Partners, Apollo Global Management, and Silver Lake Partners.

The investigation is determining whether the firms abused a tax strategy in an effort to avoid paying hundreds of millions of dollars in income taxes. The strategy involves converting certain management fees collected from investors into fund investments, which are taxed at a far lower rate than ordinary income.

Schneiderman launched the probe after many of Bain’s internal financial documents became available online. The statements revealed that the firm Romney founded got away with not paying income taxes on at least $1 billion in accumulated fees by converting them into investments that produced capital gains, which are subject to a federal tax of only 15%. Had the fees been recorded as income, Bain would have owed 35% in tax.

Romney is now a retired partner at Bain. But he continues to receive profits from the firm and did have investments in some of the funds that used the tax strategy. His presidential campaign issued a statement saying the GOP nominee did not benefit from the practice.

-Noel Brinkerhoff

To Learn More:

Inquiry on Tax Strategy Adds to Scrutiny of Finance Firms (by Nicholas Confessore, Julie Creswell and David Kocieniewski, New York Times)

The Bain Files: The Documents (by John Cook, Gawker)

New York Sues 3 Major Banks over Mortgage Fraud (by Matt Bewig, AllGov)