Tax Cheating? It’s Not Just The Trumps.
In radio shows and talks from London to Boston to Richmond, Ind., people keep asking me how the Trump family got away with stealing a half billion dollars, in today’s money, from our government, as The New York Times reported last month.
One big part of the answer is that Congress showers real estate investors with tax benefits. It also makes auditing many types of real estate transactions incredibly tedious and time-consuming. Combine that with years of budget cuts and what we get is an IRS—the federal Tax Police Department—that is well suited to pursuing the financial equivalent of tricycle thefts, but not larceny on a billionaire scale.
This may change. If we get a House or Senate under control of the Democrats we can expect thorough, expert investigations into Donald Trump’s recent personal, gift and business tax returns.
Whether that turns into real tax reform, especially when it comes to landlords who cheat, will depend on whether the citizenry demands it. In turn, that will depend on Congressional investigators. How clearly, powerfully and repetitively will they make the point that our tax system, by design, helps cheaters like the Trumps?
Separate and Unequal Taxation
The story of how the Trumps got away with what The Times called “outright fraud” begins with understanding that America has two systems of individual income taxation, separate and unequal.
One system relies on independent verification. It covers all workers, pensioners and, in the last decade thanks in part to my work, stock market investors. The other system is based on trust. Congress does not trust workers, but it assumes that people who run businesses are honest, so there is no need to independently verify the income they report.
One system is reasonably well funded. The other is starved for funds and staff to enforce the tax laws. Guess which system the Trumps fall under.
Long before Trump became president our Congress created a tax system that makes tax cheating by real estate families a breeze. By slashing the IRS staff—down a third in the last 25 years while the population grew by a quarter—the deck is stacked even more in favor of the Trumps.
The harsh reality is that Congress does not trust workers. For decades it has required that employers withhold taxes before workers get their paychecks. The taxes, along with a detailed report of how much each worker earned, go straight to the Treasury.
There is little cheating under that efficient and effective system, which is mostly automated. Indeed, 99% of income taxes due on wages are collected and turned over, the Government Accountability Office, an investigative arm of Congress, reported last year.
But when it comes to the traditional Republican base of small business owners the rate of reliable income reporting plummets, the GAO found.
Landlords, farmers and sole proprietors and some others tell the IRS how much they made. For them, there is little to no third party verification.
Instead of 99% accurate reporting, the accuracy rate for these lucky duckies is just 37%.
That doesn’t mean that only 37% of income is reported, only that just 37% of reports are accurate. The majority of these people report income, just not all of it.
Within this system where cheating predominates, there is a black hole of income that it is especially hard to detect. That hole is real estate, especially closely held real estate partnership income.
Under rules set by Congress the real estate family that cheats together is unlikely to get caught, as Jerry Curnutt, the retired IRS partnerships specialist, figured out two decades ago and I have reported on again, and again and again and again.
Our government takes little interest in the kind of cheating the Trumps and other real estate families engage in. But it takes deep interest in the possibility of tax cheating by low-wage workers.
And if they are caught, landlords can often settle for pennies on the dollar by hiring aggressive lawyers who threaten to tie up the dwindling IRS staff in court for years.
The Trumps sometimes relied on the notorious Roy Cohn, the attack-dog lawyer for Sen. Joe McCarthy before Cohn became a consigliere for the Genovese and Gambino crime families and for Donald Trump.
It also helps the Trumps and other real estate families that they often report negative incomes. Under rules set by Congress, if you own a lot of real estate you can legally report you made less than nothing for income tax purposes while living a lavish lifestyle.
Consider an IRS auditor who finds that a real estate family reported, say, $10 million of negative income on which no tax is due but really had only $1 million of negative income. Either way, no tax is due immediately. That means the IRS auditor has no incentive to pursue that unwarranted $9 million of negative income, as some auditors have told me in vivid detail.
The cheating real estate family, on the other hand, gets to carry that bogus $9 million forward until a year when they can use it to offset actual income—so it has real value to them.
Cheating High and Low
Our government takes little interest in the kind of cheating the Trumps and other real estate families engage in. In contrast to this, it takes an extraordinarily deep interest in the possibility of tax cheating by workers, especially low-wage workers.
To illustrate this let’s review an audit released Oct. 9 by J. Russell George, the Treasury Inspector General for Tax Administration or TIGTA. Congress created the position after 1997 and 1998 hearings on alleged IRS abuses of taxpayers. The hearings were shams, the testimony nonsense, as The Wall Street Journal, local newspapers, Tax Notes magazine and my reporting in The New York Times all showed at the time.
TIGTA’s latest audit examines taxes on cash tips paid to food servers, who under a federal law signed by President Clinton can be paid just $2.13 an hour, far less than the minimum wage of $7.25 an hour.
Tips are often paid in cash and often go unreported for tax purposes.
According to TIGTA, “the IRS estimates that 10% ($23 billion) of the estimated 2006 individual income tax underreporting Tax Gap ($235 billion) is due to unreported tip income by employees.”
The amount of unreported tip income is bupkis. It’s about one-third of one percent of all wage and tip income. How much tax money are we going to collect from workers who make such little money?
On the other hand, the Inspector General pays hardly any attention to high-end tax cheating. He’s never scrutinized IRS policing of hedge funds.
While George, a former Republican operative, ignores the tax habits of the rich, he has an extraordinary obsession with the working poor. I searched the TIGTA website for audits and reports on the Earned Income Tax Credit, a kind of negative income tax for low-wage workers, and got this astonishing result:12,600 hits. Few of those are audits, to be sure. But no one even blanched at TIGTA when I asked about the huge number of citations about a benefit for the working poor.
TIGTA officials declined to comment on the record.
What about the lack of audits related to hedge funds? While there are no audit reports, they do get all of two passing mentions at the TIGTA website.
And what of landlords, like the Trumps used to be when they were cheating the government? Just 11 mentions, not one of which appears to be about tax cheating and how to reduce it.