Culminating years of partisan and legal struggle, the outgoing Democratic-controlled House Ways and Means Committee released six years of former President Donald Trump’s tax returns on Dec. 30. The following days’ sensational but widely anticipated revelations that Trump routinely employed aggressive, and sometimes questionable, tax planning techniques to pay little or no tax in recent years largely eclipsed earlier disclosures that the IRS had failed to audit his tax returns while in office—in direct contravention of its own internal guidelines that mandate annual audits of the president and vice president.
While the release of the former president’s tax returns titillated and outraged, the IRS’ inexplicable failure to audit the former president is a significantly more consequential story.
What Congress found was disturbing. The House Ways and Means Committee’s summary report issued Dec. 20 found that the IRS’ mandatory presidential audit program was “dormant, at best” during Trump’s years in office. Under the IRS’ guidelines, six years of his personal income tax returns (2015 through 2020) should have been subject to mandatory audit. Yet the IRS started only one mandatory audit (for 2016) and completed none during Trump’s term in office.
The IRS waited until April 3, 2019, to start an audit of Trump’s 2015 returns—the same date the chairman of the House Ways and Committee sent a letter to the IRS commissioner requesting those returns and related information pursuant to its statutory oversight authority. The IRS didn’t designate 2015 audit as “mandatory” per its guidelines.
According to press accounts and a report issued by staff of the Joint Committee on Taxation, the IRS devoted minimal resources—only a single auditor at first—to auditing Trump’s intricate returns that included information from over 400 separate business entities. Its outgunned auditors failed to bring in specialists on complex issues and limited the scope of their audits, regularly relying on factual representations made by Trump’s lawyers and accountants instead of performing original reviews as is normal and appropriate practice in many instances.
In other words, the IRS did nothing until Congress pushed. And what little the IRS eventually did, it did poorly.
Even allowing for the fact that Congress in recent decades has systematically denuded it of the human and technological resources it needs to fulfill its mission, the IRS remains one of the world’s largest and arguably most sophisticated tax administrations. It defies rational explanation that an agency with a budget of $13.7 billion and 79,000 full-time employees did not manage to audit a handful of complex returns per its own formal procedures. Whether this failure reflects abject incompetence or willful and possibly illegal submission to political pressure from the White House or its allies, the implications are horrendous for the IRS, our culture of voluntary compliance, and public faith in our institutions.
No one likes paying taxes or the tax collector, yet the IRS plays a necessary role in support of our society and government. Just like prisons and other public institutions may be said to reflect society’s values, the US tax collection system reflects an uneasy tension between the need to raise revenue for common purposes and the high priority our society places on protecting personal and economic liberty.
Accordingly, the US tax system zealously protects the confidentiality of personal financial information and relies on voluntary compliance for about 85% of total revenue collections. It follows that the IRS’ top priority must be to promote and support a culture of voluntary compliance with our nation’s tax laws through fair, efficient, and impartial tax administration.
Why do taxpayers comply voluntarily? A large majority report their income and pay what they owe out of a (sometimes begrudging) sense of civic obligation and/or respect for the law. For this group, the IRS can and should make paying taxes easier and less burdensome. Yet there is no doubt that fear of enforcement motivates a minority, which is why the IRS must maintain robust yet impartial enforcement capabilities to serve as effective deterrents to noncompliance.
Should the IRS audit the president’s tax returns? The answer involves tradeoffs. Confidentiality remains a core tenet of our voluntary compliance system. Federal law generally prohibits the unauthorized disclosure of “tax or return” information including “whether [a] taxpayer’s return was, is being, or will be examined or subject to other investigation or processing.” It was not until 1977, in response to serious allegations of favoritism related to President Richard Nixon’s returns, the IRS adopted formal procedures requiring an annual audit of presidential returns “in the interests of tax administration.”
In essence, the IRS determined that ensuring the public’s confidence in impartial tax administration was more important than maintaining the president’s tax confidentiality. Not coincidentally, it was also good for the IRS as an institution, since it had neatly relieved itself of the potentially compromising responsibility of deciding whether to audit its ultimate boss.
The IRS’ mandatory presidential audit program receded into bureaucratic obscurity until candidate Trump refused to disclose his tax returns. Although candidates for president are under no legal obligation to disclose their tax returns, most since the Nixon era have done so voluntarily in observance of a largely unchallenged sociopolitical norm.
Trump’s decision, among the first of many to signal his willingness—even eagerness—to use the breaking of established norms as an affirmative political strategy, ignited a protracted political and legal battle that eventually prompted the congressional investigation into the IRS’ mandatory presidential audit program.
Congress’ investigation predictably has sparked calls for legislation to codify the presidential audit program. Though understandable, this reflects a sad and even ominous decrease in public confidence that a key institution will do the right thing for the right reasons without being subject to statutory mandate. The IRS made the correct decision in 1977 to formalize the program. Having made that commitment, its failure to follow through during the Trump years amounts to an indefensible act of self-harm.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Andrew Sidamon-Eristoff, an attorney and senior adviser at b2gny Group LLC, is a former New Jersey state treasurer under Gov. Chris Christie, New York state tax commissioner under Gov. George Pataki, and New York City finance commissioner under Mayor Rudolph Giuliani. He also served as a member of the New York City Council in the 1990s.
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