Trump’s tax audit shows the depth of the IRS funding problems

WASHINGTON – Before and after Donald J. Trump became president, his extremely complex and voluminous tax returns were regularly audited by the Internal Revenue Service. The number of agents assigned to the review team: one.

After he left office, the IRS said it was increasing the audit team to three. The IRS itself acknowledged that it was still reeling from the complexities of Mr. Trump’s finances and the opposition from the former president and his sophisticated army of accountants and attorneys, which included a former chief attorney for the IRS, who raised questions early last year , why even three tax officers should be commissioned to test him.

“With over 400 flow-thru returns being reported on Form 1040, it is not possible to obtain the resources available to investigate all potential issues,” IRS officials said of Mr. Trump’s tax returns in an internal memo , released this week by the House Ways and Means Committee as part of its oversight of the mandatory presidential scrutiny process.

The IRS is a broad agency, and an audit notice can instill anxiety in most taxpayers. But committee reports released this week show how jaded the IRS has become over the past decade as Republicans robbed it of funding. They also show how the agency has become increasingly unable to crack down on wealthy taxpayers who are breaking the law to lower their tax bills and have the resources to ward off tax audits if caught.

That has left over a decade with a $7 trillion “tax gap” in revenue that is owed but not collected, in many cases by super-wealthy taxpayers like Mr. Trump, who boasts he fights to get as few taxes as possible to pay. But the resource scarcity is playing out against the backdrop of a partisan and ideological struggle for the IRS that will certainly continue to limit its ability to match the capacity of an industry devoted to tax minimization and avoidance.

The agency’s workforce is as large as it was in 1970 at about 80,000. Enforcement staff has declined by over 30 percent since 2010, and audits of millionaires have declined by more than 70 percent. Its budget has declined nearly 20 percent over the past decade, accounting for inflation.

Republicans have accused the IRS of political bias and unfair attacks on conservatives for years. Because of this, they have campaigned to cut the agency’s funding or, in some cases, abolish it altogether.

The spending package that Congress is voting on this week cuts the IRS’s base funding by $275 million to $12.32 billion in what Republicans hailed as a victory.

But that doesn’t take into account the $80 billion in additional funding that the Inflation Reduction Act granted the IRS this year to bolster its resources over the next decade and hire more than 80,000 agents and employees. The Biden administration has wide discretion over how and when to use that money to modernize the agency and strengthen its enforcement capacity.

The Treasury Department, which oversees the IRS, plans to use some of those funds to hire more accountants to tackle complicated tax returns.

Charles P. Rettig, who left Mr. Trump and left the post last month, has denied any involvement in the former president’s audits. But he suggested in an email to The New York Times that the additional funding the agency is receiving will help it conduct such complex investigations.

“The IRS urgently needs additional specialized auditors and related assistance to conduct additional meaningful audits of complex individual returns that include partnerships and tiered arrangements of partnerships and similar conduit companies, foreign transactions, complex financial arrangements and the like,” said Mr. Correctly Said. He added that “many decisions within the IRS have long been resource-driven.”

Funding for the IRS is expected to be one of the first big fights in Congress next year when Republicans take control of the House of Representatives, Rep. Kevin McCarthy, the California Republican-turned-speaker, signaled in September .

“The very first day we’re sworn in, you’ll see that everything changes,” Mr. McCarthy said. “Because with our very first bill, we’re going to fire 87,000 IRS agents. Our job is to work for you, not after you.”

In November, Texas Republican Senator Ted Cruz made it clear that Republicans believe a bloated IRS is a political burden on Democrats.

“I think we should fight an epic, harrowing, protracted battle to stop the Democrats from funding 87,000 new IRS agents to harass, intimidate and prosecute Americans and their political enemies.”

The Democrats are also doubling the results. Rep. Richard E. Neal, the chair of the Ways and Means Committee, introduced legislation that would require the IRS to release presidential tax returns, review them “in a timely manner,” and update the public of the results. The House of Representatives passed the bill on Thursday, although it appears to have little chance of passage by the Senate.

The Biden administration has emphasized its ambitions to modernize the IRS’s outdated technology and improve its customer service. In an August memo outlining how the money would be used, Treasury Secretary Janet L. Yellen said the agency would focus on cracking down on wealthy tax dodgers and large corporations that have long defaulted on paying their debts to the US have withdrawn from the federal government.

She also pledged that middle-class households would not face more scrutiny and that their testing rates would not increase.

“These investments will not result in households earning $400,000 or less per year or in small businesses seeing an increase in the likelihood of being audited compared to historical levels,” Ms. Yellen wrote. “Instead, they will allow the IRS to work to end the two-tier tax system where most Americans pay what they owe, but those at the top of the distribution often don’t.”

The revelations about Mr. Trump’s audits exposed the difficulties the IRS had in auditing the wealthy. The former president proved particularly uncooperative as his team failed to provide the facts needed to resolve specific issues and threatened to protest or appeal the proceedings.

Mr. Trump’s auditing process apparently even became contentious. An internal IRS memo from the committee said, “There was some animosity between our attorney and the taxpayer’s attorney.”

The report indicated that the IRS was trying to work its way through Mr. Trump’s maze of tax returns, but tax officials seemed to assume that the claims made by Mr. Trump’s accounting firm were true.

Michael J. Graetz, assistant assistant secretary for tax policy at the Treasury Department from 1990 to 1991, said the IRS’s tolerance of large accounting firms was remarkable.

“Any return with this level of complexity and these dollars at stake is prepared by professionals, so if that were Good Housekeeping’s seal of approval then there would be very little need to inspect these types of returns,” he said Mr. said Graetz.

But it was clear from the committee’s report that, for the most part, the IRS simply lost.

An agency memo reproduced in the report described an audit team manager who described the disheartening nature of Mr. Trump’s return.

“This return has approximately 400 flow-through returns reported in Schedule E and since some of these are tiered they report approximately 500 flow-through returns in total,” the examiner said.

Underscoring the need for more resources, the memo went on to say that “to conduct a thorough review of these returns, we would need a team much larger than the current team.”

Leave a Reply

Your email address will not be published. Required fields are marked *