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The IRS Audits Trump

Posted on Dec. 30, 2022

With the release of the former President’s tax returns due today, Professor Andy Grewal offers his views on the likely reasons behind the IRS’s failure to commence mandatory audits as well as practical ideas for reform. This post originally appeared in the Notice & Comment blog on December 26, 2022. Les

In a widely anticipated move, the House Ways & Means Committee released a report on how the IRS audited Donald Trump’s tax returns. The W&M report along with the related Joint Committee on Taxation report show that Trump had ongoing audits with the IRS before he assumed office. The IRS continued those audits throughout the Trump presidency. However, the IRS did not immediately commence “mandatory” audits for returns that Trump filed after becoming President.

The W&M report has led to some heated commentary about whether the IRS failed to do its job. With that backdrop, this post will explain the mandatory audit program for Presidents, discuss some reasons that the IRS might have focused on Trump’s ongoing audits, and explore some reforms.

The Mandatory Review Program. The W&M report raises concerns about how the IRS’s audits of Trump relate to the mandatory procedures for Presidential returns. The mandatory procedures contemplate what might be called a “special review” team for those returns. More specifically, the Internal Revenue Manual states that the Small Business Division Examination Director will receive the President’s returns. See IRM 4.2.1.15 (04-23-2014) & IRM 3.28.3.5.3 (11-17-2020). That director will then transfer the President’s returns to a specific IRS manager in the proper area. That manager will then assign the returns to a field group, and IRS personnel, including potentially IRS specialists, will examine the President’s returns. This examination must happen even if the President’s return does not present red flags.

The W&M and JCT reports do not show that the IRS transferred Trump’s Presidential returns (i.e., the 2016-2019 returns) to the Small Business Division Examination Director or that the IRS otherwise followed the Internal Revenue Manual procedures. Those procedures were mentioned only for the 2016 return. See JCT Report, p.11. For the non-Presidential returns, the IRS continued its audits. They currently remain open.

Reasons for Delay. The IRS has not publicly explained why it maintained a nearly exclusive focus on Trump’s non-Presidential returns. If the IRS offered a public explanation, the agency would likely violate restrictions on the release of confidential tax return information. See 26 U.S.C. §§ 6103(a) & (b)(2). Thus, the IRS probably will not make announcements about its audits of Trump. However, the JCT report states that IRS personnel wanted to “catch up” on Trump’s older returns before turning to the Presidential returns. See JCT Report, p.11.

In theory, the IRS could have immediately established the special review team described in the Internal Revenue Manual. However, issues related to expertise or efficiency might help explain why the agency did not do so.

Regarding expertise, President’s Trump’s wide holdings would seem best reviewed by the IRS’s Large Business & International division. Presumably, that division has run Trump’s audits for years, rather than the Small Business Division described in the mandatory procedures. See also I.R.M. 1.1.24.3.1.1 (09-24-2020) (describing the LBI division’s Global High Wealth group, which “take[s] a unified look at the entire web of business entities controlled by a high wealth individual to assess the risk such arrangements pose to tax compliance and the integrity of our tax system”); JCT report, p. 38 (noting that IRS handling of some Trump audits was consistent with the IRS global high wealth audit program).

Regarding efficiency, it may have been helpful to have continuity in audits between the non-Presidential and the Presidential returns. This would be the case for tax items that relate to multiple returns. For example, to determine whether the “net operating loss carryover” claimed on the 2017 return is valid (JCT Report, p. 13), the IRS would first need to determine whether the source of that deduction, shown on an earlier return, was valid. If the IRS assembled a review team to immediately audit the 2017 return, it is unclear how they could complete their work, unless and until issues on prior years’ returns were resolved.

Whatever the reason for the IRS’s delayed audits, they do not appear to be politically motivated. The delays, after all, were not limited to the Trump Administration. The IRS, under the Biden Administration, did not select Trump’s 2019 return for audit until April 2022. Trump’s 2020 return still has not been selected for audit.

Luckily, these delays do not seem prejudicial to the government. The IRS apparently secured numerous consents from Trump to extend the government’s statute of limitations on assessment. See W&M Report, p.18. Thus, the Biden Administration can audit all the returns that Trump filed as President. Additionally, the IRS did not close any of the audits that existed when Trump took office. The Biden Administration can continue to audit the non-Presidential returns.

Reform Opportunities. If the IRS and Congress establish new rules on Presidential audits, they should take into account complex returns. An expeditious audit may be possible for only simple returns. If Congress set a short statutory deadline for the IRS to complete Presidential audits, that would create risks related to missed issues.

On the agency side, the IRS might consider flexibility in the personnel assigned to the audit team for the President’s returns. The Internal Revenue Manual’s assignment to the Small Business Division might make sense in some cases but it apparently does not work universally. Treasury and IRS officials even acknowledged that the agency’s practices differ from those in the Internal Revenue Manual. See W&M Report, p.15. The IRS should update the manual such that it reflects current practices, given the public interest in proper audits of the President.

The W&M committee recommends that the IRS more broadly staff review teams for Presidential returns.

Specifically, the report announces that review teams “must be comprised of two senior IRS agents, a partnership specialist, a foreign specialist, and a financial products specialist.” W&M Report, p.25. The committee has, perhaps unsurprisingly, gerrymandered its recommendations around Trump. However, any congressional proposal in this area should broadly serve tax policy. Congress, if it addresses the Presidential audit program in a targeted manner, should allow the IRS flexibility when it staffs a review team. A proposal that ensures proper funding for Presidential audits would be stronger than one that tries to identify specific IRS personnel to perform those audits.

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