While Trump’s tax affairs have been widely reported, statistics show that US authorities are going after the poorest families. Just seven of the 23,400 households earning on average $30 million were audited (0.03%). Yet more than a third of households earning an average $12,600 were audited – nine times the rate for the richest. David Cay Johnston reports.
Donald Trump has cheated repeatedly on his taxes, at least as far back as 1983, when he cheated on New York City sales taxes, for which then Mayor Ed Koch said Trump should have served 15 days in jail. He went to 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. It was not reported by America’s major news organizations except for a 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 that newspaper has revealed many badges of tax fraud.
To understand how Trump got away with paying little to no income taxes for many years, even after he forged at least one income tax return, it helps to understand the risks (or otherwise) wealthy Americans face for cheating.
Who is audited?
Let’s start with tax audits. In 2018 of the 23,400 richest American households, average income $30 million each, the Trump administration audited just seven for an audit rate of 0.03%.
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.
Yet that audit rate of 0.03% for America’s richest families overstates the risks to people in Trump’ situation.
Many in that highest income group have very limited opportunities to cheat. About a sixth of these rich Americans are chief executives of publicly traded companies or otherwise employed at huge salaries. Their pay is independently reported to the IRS. This means they are more like everyday Americans whose taxes are withheld before they get paid.
Opportunities for workers to cheat are almost non-existent, even for those making more than $50 million in salary and bonus as more than 200 workers have each year under Trump.
Cheating is hard to detect
The richest Americans today face a tiny risk of being detected if they cheat.
The hardest cheating to detect involves people in a particular class, those with privileges Donald Trump lobbied for and testified about to Congress. They share these characteristics, which Trump fits down to a T. They:
- Own their enterprises lock, stock and barrel, giving them total control and 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 even thousands of separate corporations and partnerships in many locations
- Operate domestically and abroad where tax treaties, rules on delaying the of reporting income on tax returns and so on 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
Now add 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 recommends how much money the IRS gets and how it will be allocated among 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.
Trump’s administration is also 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.
Tax prosecutions slump
DCReport’s investigation shows how for decades Congress has handcuffed our tax police.
We relied in part on a database maintained by the TRAC, the Transactional Records Access Clearinghouse at Syracuse University.
From official documents and interviews with tax officials, lawyers and accountants we found our government operates a system of tax law enforcement with these features:
- Tax prosecution, never a major government activity, 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” hard to believe given that 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 past 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 publicise 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 rather prosperous Americans owe. An Inspector General report says the IRS already dropped 42,600 cases and it is unlikely any of the others will be pursued
Funding cuts for tax police
Congress has defunded America’s tax police. The IRS in 2018 had less than half the resources it did 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 required tools or staff to do their job.
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. 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 the late 1990s, Congress imposed all sorts of restrictions on IRS audits. Here are just two telling examples:
- 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”.
- Corporations must be told in advance what issues will be examined. If auditors find evidence of tax owed for other reasons they cannot expand the audit unless they uncover clear evidence of criminality
The costs of favour-the-rich policies are borne by the other 99% of taxpayers.
The Framers of our Constitution were concerned deeply with corruption. 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 has effectively 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 the small fry and others who lack the resources to fight back. Or regulators would announce actions raising questions about the behaviour 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. Another tack was giving favours to gamblers connected to the Yakuza criminal gangs in Japan or the Medellín drug cartel. Casinos owned by Trump and others even extended credit, gave complimentary accommodation suites, provided liquor and sent limousines to empty the trust accounts of rich child gamblers.
Congress has actually 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. 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 overpayments is going to have a much harder time enforcing the tax laws when it comes to sophisticated tax cheating.
DC Report notes: E.R. Brydalski analysed the TRAC data used in this report. DCReport donors generously contributed money to purchase access to that database and to pay a Rochester Institute of Technology student to organise the data for analysis. Much of the data TRAC gets had to be extracted from the US government through litigation over the public’s right to know what our government is doing.