Trump audit showcases IRS woes
Agency depleted after Republicans cut needed funding
WASHINGTON — Before Donald Trump became president and after, his exceedingly complex and voluminous tax returns came under regular scrutiny by the Internal Revenue Service. The number of agents assigned to the audit team: one.
After Trump left office, the IRS said it was beefing up the audit team, to three. The tax agency itself acknowledged that it was still overwhelmed by the complexity of Trump’s finances and the resistance mounted by the former president and his sophisticated army of accountants and lawyers, which included a former IRS chief counsel and raised questions early last year about why even three revenue agents should be assigned to audit him.
“With over 400 flow-thru returns reported on the Form 1040, it is not possible to obtain the resources available to examine all potential issues,” IRS agents said of Trump’s tax returns in an internal memo that was released by the House Ways and Means Committee last week as part of its oversight of the mandatory presidential audit process.
The IRS is a sprawling agency, and an audit notice can strike fear in most taxpayers. But the committee reports released last week highlight how depleted the IRS has become in the past decade, as Republicans starved it of funding. They also show how the agency has become increasingly unable to crack down on wealthy taxpayers who push the legal limits to lower their tax bills and have the means to fend off audits if they get caught.
That has led to a $7 trillion “tax gap” of revenue over a
decade that is owed but goes uncollected, in many cases from super-rich taxpayers such as Trump, who has boasted that he fights to pay as little tax as possible.
But the resource shortfall is playing out against the backdrop of a partisan and ideological battle over the IRS that appears sure to constrain its ability to match the capacity of an industry dedicated to tax minimization and avoidance.
The agency’s workforce of about 80,000 is the same size as it was in 1970. Its enforcement staff has fallen by more than 30% since 2010, and audits of millionaires have declined by more than 70%. Its budget has declined by nearly 20%, when accounting for inflation, during the past decade.
Republicans have for years accused the IRS of political bias and unfairly targeting conservatives. For that reason, they have fought to cut the agency’s funding or, in some cases, called to
abolish it altogether.
The spending package that Congress voted on last week reduces the base funding levels for the IRS by $275 million to $12.32 billion, which Republicans hailed as a victory.
But that does not account for the $80 billion in supplemental funding that the IRS was granted through the Inflation Reduction Act this year to buttress its resources over the next decade and hire more than 80,000 agents and staff members. The Biden administration has broad discretion over how and when to deploy that money to modernize the agency and bolster its enforcement capacity.
The Treasury Department, which oversees the IRS, is planning to use some of those funds to hire more auditors who can tackle complicated tax returns.
Chuck Rettig, who was appointed as IRS commissioner by Trump and left the post last month, has denied
any involvement in the audits of the former president. But he suggested in an email to The New York Times that the additional funding the agency is receiving will help it undertake such complex examinations.
“IRS desperately needs additional specialized examiners and related support to conduct additional meaningful examinations of complex individual returns involving partnerships and tiered arrangements of partnerships and similar passthrough entities, foreign transactions, complex financial arrangements and similar,” Rettig said.
The funds for the IRS are expected to become one of the first big fights in Congress next year when Republicans take control of the House, as Rep. Kevin McCarthy, the California Republican who is seeking to become speaker, signaled in September.
Democrats are also doubling down on the findings.
Rep. Richard Neal, chair of the Ways and Means Committee, has introduced legislation that would require the IRS to publish presidential tax returns, audit them “in a timely manner” and reveal the results. The House passed the legislation Thursday, although it appears to have little prospect of passage by the Senate.
The Biden administration has emphasized its ambitions of modernizing the antiquated technology at the IRS and improving its customer service. In an August memo laying out how the money would be deployed, Treasury Secretary Janet Yellen said the agency would be focused on cracking down on rich tax dodgers and big companies that have long evaded paying what they owe to the federal government.
She also promised that middle-class households would not face more onerous scrutiny and that their audit rates would not rise.
“These investments will not result in households earning $400,000 per year or less or small businesses seeing an increase in the chances that they are audited relative to historical levels,” Yellen wrote. “Instead, they will allow the IRS to work to end the two-tiered tax system, where most Americans pay what they owe, but those at the top of the distribution often do not.”
The revelations about Trump’s audits laid bare the difficulty that the IRS has had in auditing the rich. The former president proved to be particularly uncooperative, as his team failed to provide facts needed to resolve certain issues and threatened to protest or appeal the process.
The process of auditing Trump apparently even grew contentious. An internal IRS memo detailed by the committee said, “There has been some animosity between our counsel and taxpayer’s counsel.”
The report suggested that as the IRS tried to work its way through Trump’s maze of tax returns, revenue agents appeared to take for granted that the assertions made by Trump’s accounting firm were true.
But it was clear from the committee report that for the most part, the IRS was just outgunned.
An agency memo that was recounted in the report described an audit team manager laying out the daunting nature of Trump’s returns.
“This return has about 400 flow-through returns reported on Schedule E and, since some of these are tiered, report a total of about 500 flow-through returns,” the auditor said.
Underscoring the need for more resources, the memo went on to say that to “do a thorough review of these returns, we would need a team much larger than the current team.”