Trump’s taxes are Exhibit A in the case for why the IRS needs a big upgrade

Six years of former president Donald Trump's tax returns were released by the House Ways and Means Committee on Dec. 30. (Shawn Thew/EPA-EFE/Shutterstock)

Steven M. Rosenthal is a senior fellow at the Urban-Brookings Tax Policy Center.

There are three major takeaways from the release of former president Donald Trump’s 2015-2020 tax returns last week by the House Ways and Means Committee.

First, Trump has paid little federal income tax mainly because his businesses have reported large tax losses since 1985, some of the losses real, some manufactured. Second, the IRS utterly failed at auditing Trump, both before and after he became president, largely because it lacks the skills and resources to do so. Third, Trump’s tax dodges are Exhibit A for why the IRS needs the extra $80 billion coming from last year’s Inflation Reduction Act, about half of which will go to enforcement.

Or will it? The new Republican-controlled House appears intent on rescinding almost all of the funding.

The Trump tax returns, released after a long court fight, show that he paid trivial amounts of federal income tax in 2015-2020. But he also paid little or no federal income tax across the previous three decades.

The Ways and Means Committee revealed that the IRS is no match for a taxpayer with complicated financial affairs, including Trump, who has said that not paying income tax is “smart” and manufacturing tax losses was “sport.”

At the start of my career, I helped draft tax rules for Congress. For 20 years, I advised wealthy business owners and big corporations on how to apply tax rules and defend challenges from the IRS. The tax rules are not black and white; they are gray, with lots of room for argument. And plenty of opportunity to stretch the rules beyond their intent. That’s where Trump plays.

Congress’s nonpartisan tax experts, the Joint Committee on Taxation, reported after viewing the newly released returns that Trump claimed between $7 million and $17 million of losses from his businesses each year between 2015 and 2020. But before that, he reported zero or negative income, claiming tens, and sometimes hundreds, of millions of dollars in losses from his businesses. After his casino operations failed spectacularly in the early 1990s, Trump reported $916 million in losses in 1995, allowing him to largely wipe out the need to pay taxes for about a decade.

Trump borrowed to operate his casinos. But when they failed, he did not report as income the hundreds of millions of dollars in debts that his lenders wrote off, which the law generally requires. Rather, Trump claimed he was exempt from declaring this income, notwithstanding his own lawyers’ assessment that, if challenged, his prospect of prevailing was 50-50 at best. There are no signs the IRS ever challenged him.

In 2009, Trump manufactured an additional $700 million in losses from abandoning one of his partnerships. Trump carried $105 million of these losses into 2015 and used them through 2018 to reduce his tax burden.

Those losses also are suspect. The New York Times reported that Trump retained some benefits from the abandonment, which tax rules do not permit.

When Trump became president, the IRS already was auditing his returns from 2009 onward. Those examinations continue, based on the returns just released. Perhaps the IRS has been too overwhelmed, or intimidated, to complete these earlier audits — or to go to court and try to collect what might be owed.

In Trump’s latest returns, other aggressive tax positions were scattered across his approximately 500 separate entities, apparently mixing personal and business expenditures. As Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee, has been spotlighting, the IRS struggles to audit these types of entities, known as pass-through businesses and partnerships.

Despite a requirement to audit presidential tax returns every year, the IRS barely audited Trump’s. The agency assigned the first audit to a single agent near the end of the third year of Trump’s presidency. That agent, in effect, outsourced a large part of the job, relying on Trump’s accountant and tax lawyer “to ensure the taxpayer properly reported all income and deductions,” according to the Joint Committee on Taxation, after reviewing IRS workpapers, which have not been publicly released.

For the other presidential audits, the IRS added two more agents, after Trump left office. But still the IRS did not plan to examine $26 million of consulting fees across Trump’s approximately 500 businesses as “the resources needed to examine would far outweigh any potential benefits,” according to the workpapers. All of the IRS’s audits of Trump’s returns during his presidency remain unfinished.

Trump’s aggressive tax strategy might yet pay off. He cloaked his tax liability in the complexity of his business empire, which stymied the IRS. And, as is often the case, the IRS might just give up.

The last time the Republicans retook the House, in 2010, they started slashing the IRS’s budget. Since then, IRS annual funding has declined by 23 percent, after adjusting for inflation. That included a 26 percent cut to the IRS enforcement budget.

The vow by Republicans controlling the House to block the $80 billion designated for the IRS is a mistake: The agency needs to be significantly bolstered to discourage cheating on taxes, no matter how sophisticated the dodge. Otherwise, public confidence in the fairness of the tax system will deteriorate, and the temptation to cheat on taxes will rise.