Fight for Trump’s tax returns will likely rev up fight over future IRS funding

The Democrat-controlled Ways & Means Committee report on former President Donald Trump’s tax returns revealed an IRS presidential audit program that was “dormant” and delayed.

The majority’s report, released Tuesday, also shined another light on IRS operations and staff that, it says, have been outmatched by sophisticated taxpayers with complex returns — be they presidents or otherwise.

When the IRS has $80 billion in extra funding coming over a decade, but a Republican majority about to control the House of Representatives next year, the findings — and the imminent release of Trump’s tax returns — will do little to patch the partisan divide over future IRS funding, observers say.

“It exacerbates the political animosity that Republicans have toward the agency,” said Ben Koltun, director of research at Beacon Policy Advisors.

IRS requirements dating back to 1977 mandate audits of presidential tax returns. Ultimately, while Trump was in office, the IRS selected his returns for examination during two years, tax year 2015 and 2016, the report said.

The first audit started two years into Trump’s presidency. It was opened on the same date the Ways & Means Committee requested his returns, Democrats noted.

Here’s what followed, according to the majority report:

“The mandatory audit of the former President was conducted, mostly, by one revenue agent. The individual tax return of the former President included the activities of hundreds of related and pass-through entities, numerous schedules, foreign tax credits, and millions of dollars in [net operating loss] carryforwards.”

The report pointed at one internal IRS memo from an audit manager. Given the sheer complexity, “it is not possible to obtain the resources available to examine all potential issues,” the memo said.

The report also hints at one dust-up between the IRS and Trump’s representatives. When the IRS review team added two more revenue agents, Trump’s side grew “concerned about the team size.” Meanwhile, the report said, Trump’s representatives included a former IRS chief counsel and partners at a “global law firm.”

Going forward, the IRS needs more staff for the sensitive, specialized reviews, the report urged. That ought to include “two senior IRS agents, a partnership specialist, a foreign specialist, and a financial products specialist,” the report said.

A separate report from the nonpartisan Joint Committee on Taxation said it disagreed when the IRS didn’t call in specialists for Trump’s returns.

The IRS did not respond to a request for comment, but Trump and other Republicans have scorched the report and the vote along party lines to release Trump’s returns in the coming days. The release would be an “unprecedented leak by lame duck Democrats,” a Trump spokesman said.

The report comes while IRS capabilities are a hot-button issue. The Inflation Reduction Act included $80 billion over a decade to the IRS, with just over half earmarked for better enforcement aimed at rich households and corporations.

Democrats said it was a much-needed infusion for an agency that’s been stretched far too thin, with declining audit rates and personnel. Republicans said it was far too much money with far too little oversight that would result in overreach from the tax man.

As Republicans take the House in 2023, one tax question is what happens to the $80 billion? President Joe Biden still has veto power and the Senate stays with Democrats, so the chance of a repeal could be slim, observers said. A more likely outcome could be fights for smaller annual appropriations while letting the $80 billion fill the gap, they said.

Indeed, the omnibus spending bill that Congress is racing to pass before the end of the year includes a slightly smaller appropriation for the IRS next year. There’s a 2% cut, bringing the IRS budget next year to $12.3 billion.

The Ways and Means report may have painted the picture of an tax agency on its heels instead of an overzealous one, but Koltun said that didn’t matter.

“Republicans see this as a purely political act by Democrats. … It only plays to the fundamental notion that Republicans view the IRS as this political entity.”

(Recently, a Treasury Department watchdog said audits of two high-ranking FBI officials who left on bad terms with the Trump administration appeared to be coincidence with no “misconduct.”)

“Over our objections in opposition, Democrats in the Ways and Means Committee have unleashed a dangerous new political weapon that overturns decades of privacy protections,” Rep. Kevin Brady of Texas, the committee’s ranking Republican, said Tuesday.

“The era of political targeting, and of Congress’s enemies list, is back and every American, every American taxpayer, who may get on the wrong side of the majority in Congress is now at risk,” he added.

The Ways and Means Committee findings wouldn’t move any hearts and minds on IRS funding, said Pete Sepp, president of the National Taxpayers Union, a right-leaning tax think tank.

“I think the die was already cast before that report came out,” he said.

Lawmakers can keep pressing at the idea that the IRS is “outmatched” by wealthy taxpayers, “but in the end, Congress ought to be equal partners in making sure the IRS focused on serving as many taxpayers as possible.”

That’s not happening with the $80 billion, he said. The IRS is expected early next year to elaborate how it plans to use the money.

Sepp says the IRS needs more money to improve operations, service and enforcement, but not like this.

The $80 billion in money that Democrats “essentially threw over the wall [and] told the IRS to figure out how to spend it is not the finest hour for managerial strategy. No amount of funding this large was granted with so little guidance,” he said.

 

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