It Helps If You’re the President—Who Can Block IRS Enforcement of Tax Laws
By
David Cay Johnston, DCReport Editor-in-Chief
Let’s start with IRS
audits of the 23,400 richest American households, average income $30 million
each. In 2018 the Trump administration audited seven. You read
that right—seven. That’s an audit rate of 0.03%.
If American police
detected murders at the same rate it would mean that they would become aware of
just five of the 16,214 reported homicides that year. Of course, not everyone
is a tax cheat, but audits are about detecting taxes due, whether through error
or intent.
Under Obama in 2015,
America’s richest households were 270 times more likely to be audited than
under Trump.
It also helps to know
that about 1 million rich Americans didn’t even bother to file income tax
returns during Barack Obama’s last years in office. America’s tax police, the
near toothless Internal Revenue Service, are so short-staffed that the inspector
general says they aren’t even trying to make the scofflaws pay
the estimated $47.5 billion they owe.
There’s no question
Trump is a tax cheat because he has done it again and again. He cheated on New
York City sales taxes in
1983, for which Mayor Ed Koch
said Trump should have served 15 days in jail. He went to extreme,
even farcical lengths to evade $3 million of payments he owed in lieu of taxes
to New York City.
Trump has been tried twice for civil tax fraud. He lost both times, a story I broke four years ago but you may not know about because America’s major news organizations have not reported it except for one passing mention in the wedding announcement section of The New York Times.
Two years ago, however, that newspaper did an exhaustive
report showing years of
calculated gift tax cheating by two generations of Trumps. In recent
weeks income tax information that newspaper reported revealed many badges of
tax fraud.
So why hasn’t Donald
Trump been brought to justice? After all, everyday radio and television
commercials tell us of the power the IRS has to garnish our wages, seize our
bank accounts and even take our homes. Surely brazen tax cheats live in fear of
arrest and losing their mansions, jets and yachts, right?
Auditing the Working Poor
Now let’s compare the
audits of people in Trump’s income class with the working poor, defined as
households with incomes under $25,000. They were the subject of almost a third
of all IRS audits even though average income was just $12,600.
The audit rate for poor families is 0.28%.
That’s nine times the audit rate for the richest Americans.
This is a dramatic
shift from the recent past. Under Obama in 2015, America’s richest households
were 270 times more likely to be audited than under Trump, my analysis of IRS Data Book tables
data shows. That year 8.16% of these households had their tax returns audited,
not 0.03%.
These vast disparities
are just one aspect of a many-sided story about the myth of the all-powerful
IRS and how a particular class of rich Americans, a class that includes Trump,
almost always wins when they play what in tax world is called audit roulette.
The cold hard truth is
that the richest Americans today face a teensy-weensy risk of being detected if
they cheat. The hardest tax cheating to detect involves people in a particular
class. It is a class with privileges
Donald Trump lobbied for and testified about to Congress. The
taxpayers who are by far the hardest to identify as cheats share these
characteristics the IRS is ill-equipped to address:
Own their enterprises
lock, stock and barrel, giving them total control with no independent
verification of revenue
File tax returns that
appear on the surface to be accurate, even clean as a whistle
Make use of hundreds
and in some cases thousands of separate corporations and partnerships in many
different locations, a tax evasion helper that will be explained later in this
series
Operate domestically
and abroad where tax treaties, rules on delaying reporting income on tax
returns and mismatches between rules of different governments create
opportunities to hide money
Own commercial real estate
because the gains from selling property are not automatically reported to the
IRS, unlike wages and dividends
Trump fits those
conditions to a T. Later in this series, we’ll explore just how he always
benefitted from the ways our Congress has instructed the tax police to operate.
Presidential Powers
Now add to all this Trump’s powers as president. He appoints the Treasury secretary and the IRS commissioner, who had been a Beverly Hills specialist in helping suspected tax cheats avoid indictment. Trump also recommends how much money the IRS gets and how it will be allocated among various functions such as processing refunds and collecting unpaid taxes.
This
and more means Trump exercises enormous power and influence over which
potential tax cheats, if any, will be found. Because he also appoints America’s
attorney general, Trump influences which suspected tax cheats will be prosecuted.
In addition, Trump’s
administration is violating an anti-corruption
law enacted 96 years ago after the Teapot Dome
scandal. That law gives certain people in Congress the same right he
has to inspect any income tax return. At least three staffers on the
Congressional Joint Committee on Taxation work at the IRS just to inspect tax
returns, especially those seeking individuals refunds of $2 million or more,
for badges of fraud. Trump got a nearly $73
million refund; he recently confirmed the IRS wants it
back.
Trump refuses to allow the chairman of the House Ways and Means Committee, which writes our tax laws, to inspect his tax returns. The committee is suing for access. It is the only known case of a tax return being withheld by any president since 1924 when Calvin Coolidge was president.
That sentence is qualified only
because the IRS is stalling on DCReport’s Freedom of
Information Act request for a single number – how many times has the IRS
refused or declined to turn over a tax return request in writing by the
appropriate lawmakers and staff.
Who Gets Audited
That 0.03% audit rate
for America’s richest families is misleading. It overstates the risks to people
in Trump’s situation.
Many in that highest
income group have very limited opportunities to cheat. About a sixth of these
rich Americans are CEOs of publicly traded companies or otherwise employed at
huge salaries. Their pay is independently reported to the IRS. This means that
they are more like Joe and Joan Sixpack whose taxes are withheld before they
get paid.
Opportunities for
workers to cheat almost nonexistent, even for those making more than $50
million in salary and bonus as more than 200
workers have each year under Trump.
We cite these facts to
give you a lens through which to focus as this DCReport series
examines the state of Trump’s taxes and the capacity of the Internal Revenue
Service, our national tax police department, to enforce the tax laws.
DCReport’s investigation into how Trump and others
like him enjoy robust opportunities to cheat on their taxes with little risk of
detection shows how for decades Congress has handcuffed our tax police. It’s as
if your local mayor and city council told their police officers to focus on
tricycle thefts, not violent crimes, and wouldn’t pay for testing equipment and
chemicals in the crime lab.
We relied in part on a
database maintained by the TRAC,
the Transactional Records Access Clearinghouse at Syracuse University. DCReport donors
generously contributed money to purchase access to that database and to pay a
Rochester Institute of Technology student to organize the data for analysis.
Much of the data TRAC gets had to be extracted from our government through
litigation over the public’s right to know what our government is doing.
Tax Prosecutions
Vanishing
From various
official documents and
interviews with tax officials, tax defense lawyers and accountants we found our
government operates a system of tax law enforcement with these features:
Tax prosecution, never
a major government activity and generally slipping for decades, collapsed under
Trump
In 2016, the last
Obama year, the IRS referred 2,744 tax cases for prosecution. Since Oct. 1,
2019, the IRS has referred just 231 cases
Justice rejected 162
of those cases, or 70%, for “insufficient evidence,” an extraordinarily and
hard to believe justification since on average each case involved more than a
year of detective work
Justice rejected an
additional 28 cases because prosecuting suspected tax criminals isn’t a
“national priority”
Justice Department’s
own data shows it is pursuing just 29 new cases
More than half of IRS
criminal cases in the last decade were about illicit proceeds from narcotics
trafficking, money laundering and other criminal activity, not tax cheating by
people who underreport their income from lawful activities or overstate their
deductions
Last year Justice
Department prosecutors obtained just 530 guilty pleas and convictions after
trial, making the odds of an American adult being found guilty of a federal tax
crime about one in 473,000
The public never heard
about most of those cases because the Justice Department failed to publicize
them
Almost 900,000
high-income Americans didn’t even file a tax return in the last three years of
Obama
Virtually no effort is
being made to collect the estimated $47.5 billion these prosperous-to-rich
Americans owe. An Inspector
General report says the IRS already dropped 42,600 cases and it
is unlikely that any of the others will be pursued
Defunding America’s Tax
Police
The reality is
Congress has defunded America’s tax police. The IRS in 2018 had less than half
the resources it did, relative to the size of the economy, as when Ronald
Reagan was president in 1988, my analysis of federal budget data shows.
Over several decades, as anti-tax activist Grover Norquist persuaded Republicans to sign ironclad pledges to never raises taxes, these same officeholders have worked to make sure the IRS doesn’t have the tools or staff to make sure people and companies pay what the law says they owe.
Trump personally lobbied for one key change creating an
entitlement program for real estate investors that lets them live tax-free if
they are rich enough and follow the rules, making his own tax behavior all the
more curious.
The beneficiaries of
this throttling of the tax police budget and hobbling its operations have been
the thin and increasingly rich slice of Americans at the top, especially people
who like Trump exert total control of their business affairs.
Republicans persuaded enough Democrats to go along in handcuffing our tax police through laws, some of them based on bogus testimony by people who said they were victims of abusive IRS tactics. By law, the IRS could not respond to the Senate testimony. Congress’ Government Accountability Office later wrote a secret report that showed the hearings were unreliable, Ryan Donmoyer of Tax Notes Magazine revealed in 2000.
However, subsequent
investigations by The Wall Street
Journal, Tax Notes Magazine, The Virginian-Pilot and by me when
I was the tax reporter for The New York Times showed the
hearings were a sham from start to finish.
In response to the
1997 and 1998 Senate Finance Committee hearings led by the late Sen. William
Roth of Delaware, and other hearings, Congress imposed all sorts of
restrictions on IRS audits. Here are three telling examples we will explore
later in this series:
IRS auditors who
notice that a taxpayer reports income of under $100,000 but has mansions, fine
art and more cannot use that to begin a “lifestyle audit.” One man was caught
only because a mistress, furious that he didn’t keep a promise to buy her a
condo, ratted him out to the IRS
Corporations must be
told in advance what issues will be examined. If auditors find along the way
evidence of tax owed for other reasons they cannot expand the audit unless they
uncover clear evidence of criminality
While Congress
authorizes what look to be major cash awards to whistleblowers who report tax
cheating the program has added less than $1 to every $5,000 in taxes Uncle Sam
collects and it takes more than a decade on average to pay these awards
The costs of these
favor-the-rich policies even when they cheat are borne by the other 99% of
taxpayers. Tax burdens could otherwise be eased through reductions in
government spending for their benefit and in added federal debt.
Institutional Corruption
The Framers of our
Constitution were concerned deeply with corruption, but not the way they think
of it today. They were well aware of the personal venality that today permeates
the news from supermarket tabloids to the network news programs. But the
Framers focused on how to ensure against institutional corruption ruining our
democracy and our society. Law professor Zephyr Teachout explained it in plain
English in her book Corruption in
America: From Benjamin Franklin’s Snuff Box to Citizens United.
Congress pretty much
has imposed on the IRS the same institutionally corrupt approach that New
Jersey casino regulators employed when Trump dominated Atlantic City gambling.
New Jersey officials
created the impression of zealous law enforcement by noisily going after small
fries and others who lack the resources to fight back. Or the regulators
announced actions raising questions about the behavior of casino owners in
dealings with mobsters, cocaine
traffickers and money launderers while
working hard to avoid making inquiries that would expose wrongdoing by those at
the top.
My first book, Temples of
Chance, revealed this institutionally corrupt strategy with many
examples like cheating novice
roulette players at one Trump casino. Another tack was giving
favors to gamblers
connected to the Yakuza criminal gangs in Japan or the Medellín drug cartel.
Casinos owned by Trump and others even extended credit, comped suites, provided
liquor and sent limousines to empty the trust accounts of rich child gamblers.
Actually, Congress has
gone much further to hobble America’s tax police.
The IRS is so short-staffed it cannot even send refunds it acknowledges are owed from 2017 tax returns. Instead of a refund check, some beleaguered taxpayers have shown me form letter after form letter directing them to not ask about their refund for yet another 60 days.
An IRS that is not even staffed to
refund people’s overpayments is going to have a much harder time enforcing the
tax laws when it comes to sophisticated tax cheating.
E.R. Brydalski
analyzed the TRAC data used in this report.