The Internal Revenue Manual requires an audit for every income tax return filed by a sitting U.S. president or vice president. That requirement, which first appeared in 1977, is part of a broader set of procedures governing the treatment of White House returns. And while general in nature, it arose within a specific historical context: the aftermath of the Nixon presidency.
Three parts of the IRM outline the procedures for dealing with presidential and vice presidential returns: Part 3, Chapter 28, section 3; Part 4, Chapter 2, section 1; and Part 4, Chapter 8, section 4.
As the Joint Committee on Taxation noted in a recent report, the procedures for processing presidential and vice presidential returns differ from those applied to returns filed by mere mortals. To begin with, presidential and vice presidential returns must be mailed to the field director of the Austin Submission Processing Center in Texas, rather than to a service center based on place of residence. The field director or a designated subordinate then processes the returns, taking care to ensure that “the original returns are not unnecessarily folded or bent, and the edit marks and stamps are neatly placed on the returns, since they are deemed permanent records by the National Archives.”
Permanent Records
The National Archives and Records Administration (NARA) uses the designation “permanent records” to identify materials of “sufficient value to warrant their preservation in the National Archives even while they remain in agency custody,” according to the NARA website. Agencies are expected to ensure that those records are “protected, secured, and preserved while they are still in agency custody.”
The IRS apparently complies with this requirement not simply through its special handling procedures, but also by storing presidential returns in a special purpose safe. The existence of that safe has been much discussed in news articles over the years. However, a 1997 report by the Government Accountability Office confirmed the existence of a locked safe at IRS headquarters containing all presidential and “some” vice presidential returns dating back to 1913. The returns were stored in alphabetical order, and most were kept in special folders designed to protect the paper from degradation. The returns amounted to about 5 cubic feet of material. (Prior coverage: Tax Notes, Oct. 13, 1997, p. 202.)
Agencies are typically required to transfer permanent records to NARA custody at some point, but according to IRS Records Control Schedules, “there are currently no transfer instructions for these returns” because they “contain information subject to the disclosure limitations of Section 6103 of the Internal Revenue Code.”
The Audit
Once their initial processing is finished, presidential and vice presidential returns are mailed in double-sealed envelopes to the deputy commissioner for services and enforcement in Washington. (A copy is retained by the Austin processing campus.) At that point, the returns are subjected to a mandatory audit. The IRM requires this audit regardless of how the returns score on the agency’s Discriminant Index Function, typically used to flag returns with high audit potential.
The small business/self-employed director of examination transfers the tax returns to a planning and special programs territory manager, who then assigns the examination to a group of auditors within 10 business days. “The returns require expeditious handling at all levels to ensure prompt completion of the examinations,” the IRM states.
The audit itself resembles the audits conducted for IRS employees. There’s no special indication in the IRM about the thoroughness or rigor of presidential and vice presidential audits. When complete, however, the audit results are subject to a mandatory review by the employee audit reviewer at Baltimore Technical Services. “The final mandatory review verifies the audit was conducted in accordance with established procedures and the appropriate conclusions were reached,” the JCT explained in its description of the process.
“The IRM provides that IRS employees must never initiate, terminate, or in any way modify their work on the president’s and vice president’s individual income tax returns based on requests from executive branch employees,” the JCT said. “Along similar lines, the Code generally prohibits any applicable person (including the President, Vice President, and any employee of the executive office of the President or the Vice President) from requesting that any officer or employee of the IRS conduct or terminate an audit or otherwise investigate or terminate the investigation of any particular taxpayer with respect to the tax liability of that taxpayer.”
Origins of the Audit
The picture is hazy, thanks to privacy restrictions on IRS historical records, but it’s probable that American presidents have been routinely audited for most of the last century; my own research suggests that the IRS has long taken a special interest in returns filed by prominent individuals, including politicians.
The mandatory presidential audit, however, has a clear moment of creation. On June 24, 1977, the IRS released new procedures formally requiring an audit for sitting presidents and vice presidents. According to an IRS official at the time, the new policy was established “in the interest of sound administration” and in light of “everything that has happened in the past.”
The “past” in question was President Nixon’s (and probably that of Nixon’s first vice president, Spiro Agnew, who pleaded no contest to a single charge of tax evasion before resigning from office). In fact, Nixon’s returns had been audited by the IRS at least twice, despite the absence of a mandatory audit process during his presidency. The second audit, conducted in concert with the Joint Committee on Internal Revenue Taxation examination of his returns filed between 1969 and 1973, found numerous problems.
But the initial audit of Nixon’s 1971 and 1972 returns had given the president an obsequious pat on the back: “Our examination of your income tax returns for the year 1971 and 1972 reveal that they are correct. Accordingly, these returns are accepted as filed. I want to compliment you on the care shown in the preparation of the returns.” (Staff of House Judiciary Committee, “Impeachment Inquiry: Hearings Before the Committee on the Judiciary, House of Representatives, 93d Congress, second session, pursuant to H. Res. 803,” at 1490 (1975).)
The IRS explained its new policy as a way to reduce pressure on the agency. From then on, no IRS employee would be saddled with the onerous decision of whether to audit the president: It would be routine.
Jimmy Carter, the first president to experience one of the new mandatory audits, welcomed its arrival. His press secretary, Jody Powell, predicted that automatic audits would help “allay any concerns in the public about the president’s payment of taxes.”
Powell’s comments came barely a week after the White House announced that Carter’s 1975 return had been under audit even before he took the oath of office (and possibly before he won the 1976 election). White House officials initially insisted that Carter had requested the audit of his 1975 return. Almost immediately, however, they acknowledged that the audit — as well as the new mandatory audit policy — had originated from within the IRS itself. (Prior coverage: Tax Notes, Apr. 17, 2017, p. 289.)
Audits After Nixon
The advent of mandatory audits was a delayed response to Nixon’s tax troubles — and quite possibly to some lingering IRS embarrassment about the initial, less-than-thorough audit of his returns. Since 1977, the procedures governing those audits have been tweaked several times, but they remain largely intact.
The results of the audits, however, remain hidden from public view. As the JCT observed in its recent report: “The president’s and vice president’s audit and associated investigation, return adjustments, and conclusion are protected ‘return information’ and remain confidential.”
All of which raises the possibility that automatic audits might still be slipshod. That may be why presidents from Nixon to Obama chose to supplement the mandatory audit regime with the tradition of voluntary return disclosure — effectively crowdsourcing audits for the nation’s chief executive.