Justin Elliott

Erik Prince threatens ProPublica reporters after they reveal special trusts he and others exploited to avoid estate taxes

by Jeff Ernsthausen, James Bandler, Justin Elliott and Patricia Callahan

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

Series: The Secret IRS Files

Inside the Tax Records of the .001%

It's well known, at least among tax lawyers and accountants for the ultrawealthy: The estate tax can be easily avoided by exploiting a loophole unwittingly created by Congress three decades ago. By using special trusts, a rarefied group of Americans has taken advantage of this loophole, reducing government revenues and fueling inequality.

There is no way for the public to know who uses these special trusts aside from when they've been disclosed in lawsuits or securities filings. There's also been no way to quantify just how much in estate tax has been lost to them, though, in 2013, the lawyer who pioneered the use of the most common one — known as the grantor retained annuity trust, or GRAT — estimated they may have cost the U.S. Treasury about $100 billion over the prior 13 years.

As Congress considers cracking down on GRATs and other trusts to help fund President Joe Biden's domestic agenda, a new analysis by ProPublica based on a trove of tax information about thousands of the wealthiest Americans sheds light on just how widespread the use of special trusts to dodge the estate tax has become.

More than half of the nation's 100 richest individuals have used GRATs and other trusts to avoid estate tax, the analysis shows. Among them: former Democratic presidential candidate Michael Bloomberg; Leonard Lauder, the son of cosmetics magnate Estée Lauder; Stephen Schwarzman, a founder of the private equity firm Blackstone; Charles Koch and his late brother, David, the industrialists who have underwritten libertarian causes and funded lobbying efforts to roll back the estate tax; and Laurene Powell Jobs, the widow of Apple founder Steve Jobs. (Powell Jobs' Emerson Collective is among ProPublica's largest donors.)

More than a century ago amid soaring inequality and the rise of stratospherically wealthy families such as the Mellons and Rockefellers, Congress created the estate tax as a way to raise money and clip the fortunes of the rich at death. Lawmakers later added a gift tax as a means of stopping wealthy people from passing their fortunes on to their children and grandchildren before death. Nowadays, 99.9% of Americans never have to worry about these taxes. They only hit individuals passing more than $11.7 million, or couples giving more than $23.4 million, to their heirs. The federal government imposes a roughly 40% levy on amounts above those figures before that wealth is passed on to heirs.

For her part, Powell Jobs has decried as “dangerous for a society" the early 20th century fortunes of the Mellons, Rockefellers and others. “I'm not interested in legacy wealth buildings, and my children know that," she told The New York Times last year. “Steve wasn't interested in that. If I live long enough, it ends with me."

Nonetheless, after the death of her husband in 2011, Powell Jobs used a series of GRATs to pass on around a half a billion dollars, estate-tax-free, to her children, friends and other family, according to the tax records and interviews with her longtime attorney. By using the GRATs, she avoided at least $200 million in estate and gift taxes.

Her attorney, Larry Sonsini, said Powell Jobs did this so that her children would have cash to pay estate taxes when she dies and they inherit “nostalgic and hard assets," such as real estate, art and a yacht. (At 260 feet, Venus is among the larger pleasure ships in the world.) Without the $500 million or so passed through the trusts, he said, Powell Jobs' heirs would have to sell stock that she intends to give to charity to pay her estate tax bill.

Sonsini said Powell Jobs, whose fortune is pegged at $21 billion by Forbes, has already given billions away to charity and paid $2.5 billion in state and federal taxes between 2012 and 2020. “When you look at an estate that may be worth multiple billions, and all the rest is going to charity, and you put it in perspective, what is the problem we're worried about here?" Sonsini asked. “This is not about creating dynasty wealth for these kids."

In a written statement, Powell Jobs said she supports “reforms that make the tax code more fair. Through my work at Emerson Collective and philanthropic commitments, I have dedicated my life and assets to the pursuit of a more just and equitable society."

Others whose special trusts ProPublica identified, including Bloomberg and the Kochs, declined to comment on why they'd set up the trusts or their estate-tax implications. Representatives for Lauder didn't respond to requests to accept questions on his behalf. Schwarzman's spokesperson wrote that he is “one of the largest individual taxpayers in the country and fully complies with all tax rules."

A typical GRAT entails putting assets, like stocks, in a trust that ultimately benefits a person's heirs. The trust pays back an amount equal to what the trust's creator put in plus a modest amount of interest. But any gains on the investments above that amount flow to the heirs free of gift or estate taxes. So if a person puts $100 million worth of stock in a GRAT and the stock rises in value to $130 million, their heirs would receive about $30 million tax-free.

In 1990, Congress accidentally created GRATs when it closed another estate tax loophole that was popular at the time. The IRS challenged the maneuver but lost in court.

“I don't blame the taxpayers who are doing it," said Daniel Hemel, a professor at the University of Chicago Law School. “Congress has virtually invited them to do it. I blame Congress for creating the monster and then failing to stop the monster once it became clear how much of the tax base the GRAT monster would eat up."

Users of the trusts extend well beyond the top of the Forbes rankings, ProPublica's analysis of the confidential IRS files show. Erik Prince, founder of the military contractor Blackwater and himself heir to an auto parts fortune, used the shelter. Fashion designer Calvin Klein has used them, as have “Saturday Night Live" creator Lorne Michaels and media mogul Oprah Winfrey.

“We have paid all taxes due," a spokesperson for Winfrey said. A representative of Klein did not accept questions from ProPublica or respond to messages. A spokesman for Michaels declined to comment.

Prince also did not answer questions. “Hey if you publish private information about me I'll be sure to return the favor," he wrote. “Go ahead and fuck off."

The GRAT has become so ubiquitous in recent decades that high-end tax lawyers consider it a plain vanilla strategy. “This is an off-the-shelf solution," said Michael Kosnitzky, co-leader of the private wealth practice at law firm Pillsbury Winthrop Shaw Pittman. “Almost every wealthy person should have one."

ProPublica's tally almost certainly undercounts the number of Forbes 100 members who use shelters to avoid estate taxes. ProPublica counted only those people whose tax records or public filings explicitly mention GRATs or other trusts commonly used to dodge gift and estate taxes. But a wealthy person can call their trusts whatever they want, leaving plenty of trusts outside of ProPublica's count.

This month, the House and Senate are hammering out proposals to raise revenue to help pay for the Biden administration's plans to expand the social safety net. The legislative blueprint released by House Ways and Means Committee Chairman Richard Neal, D-Mass., would defang GRATs and other trusts, which would still be legal but no longer be as useful for estate tax avoidance. If the provision makes it into law, “it would put a major dent in GRATs," said Bob Lord, an Arizona attorney who specializes in trusts and estates.

Senate Budget Committee Chairman Bernie Sanders, I-Vt., has proposed going further in undercutting estate tax avoidance tools. But the prospect of any reform is uncertain, as Democrats on Capitol Hill struggle to find the votes to pass the package of spending and tax changes.

GRATs are commonly described by tax lawyers as a “heads I win, tails we tie" proposition. If the investment placed in the GRAT soars in value, that increase passes to an heir without being subject to future estate tax. If the investment doesn't go up, the wealthy person can simply try again and again until they succeed, leading many users to have multiple GRATs going at a time.

For example, Herb Simon, founder of the country's biggest shopping mall empire and owner of the Indiana Pacers, was one of the most prolific GRAT creators in records reviewed by ProPublica. Since 2000, he has hatched dozens of the trusts, often more than one a year. In an interview with The Indianapolis Star in 2017, the octogenarian Simon said, “It's always a big tax problem" for the next generation when someone dies, “but we've worked that tax problem. We won't have a problem with that."

A spokesperson for Simon didn't respond to questions for this article.

Mentions of these trusts have periodically surfaced in the press after being disclosed in securities filings, as was the case with trusts held by Facebook co-founders Mark Zuckerberg and Dustin Moskovitz and Chief Operating Officer Sheryl Sandberg. In 2013, Bloomberg News published a groundbreaking series on GRATs, mining securities filings and other records to reveal how the mega-rich, including casino magnate Sheldon Adelson and such families as Walmart's Waltons, had perfected the use of the device.

ProPublica's data shows that Michael Bloomberg, the majority owner of the company that bears his name and No. 13 on Forbes' list of the wealthiest Americans, is himself a heavy user of GRATs. Over the course of a dozen years, he repeatedly cycled pieces of his private company in and out of the trusts — often opening multiple GRATs in one year. During that time, hundreds of millions of dollars in income flowed through Bloomberg's GRATs, giving him opportunities to shield parts of his fortune for his heirs.

ProPublica described the transactions (but not the name of the person engaging in them) to Lord, the trusts and estates attorney. The GRAT is “the perfect loophole to avoid estate and gift tax in this situation," said Lord, who is also tax counsel for Americans for Tax Fairness and an advocate for estate tax reform.

When Bloomberg ran for president in 2020, he vowed to shore up the estate tax. “Owners of the biggest estates are expert at gaming the system to reduce what they owe," a campaign fact sheet for his tax plan said. Bloomberg vowed to “lower the estate-tax threshold, so that more estates are taxed," and to “shut down multiple estate-tax avoidance schemes." His fact sheet offered few details as to how he would do that, and it didn't mention GRATs.

The legislation Congress is now considering to curtail GRATs would leave open other options for estate tax avoidance, including a cousin to the GRAT known as a charitable lead annuity trust, or CLAT, which contributes to charity while passing gains from stocks and other assets on to heirs. And the legislation would grandfather in existing trusts, meaning that those who have already established trusts would be able to continue to use them to avoid paying estate taxes.

That has set off a predictable push by tax lawyers to get their clients to create tax-sheltering trusts before any new legislation takes effect.

Porter Wright, a law firm that offers estate planning services, told existing and potential clients it was “critical" to evaluate opportunities because “the window may close very soon. There are important and time sensitive issues which could substantially impact the amount of wealth you are able to transfer free of estate and gift tax to future generations."

A House bill would blow up a tool of the superwealthy to avoid taxes

This was first published by ProPublica, a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

Legislation currently making its way through Congress would take a sledgehammer to the massive individual retirement accounts built up tax-free by a select group of the ultrawealthy.

The proposal, which is part of the infrastructure and tax package advancing in the House, targets the jaw-dropping IRAs accumulated by multimillionaires and billionaires such as tech investor Peter Thiel, which were first reported by ProPublica earlier this year. Those accounts — Thiel's alone was worth $5 billion in 2019 — have allowed some super-wealthy Americans to turn their Roth IRAs, tools meant to incentivize middle-class retirement saving, into supersized tax shelters.

The proposed reform, put forward by House Ways and Means Chairman Richard Neal, D-Mass., would effectively cap the total amount someone could hold in a Roth at $20 million and compel the holders of the giant accounts to withdraw anything over that limit. Separately, individuals would have to add up the balances of their retirement accounts — including Roths, traditional IRAs, 401(k)s and 403(b)s — and every year withdraw half of any amount over $10 million. The provisions would only apply to individuals with taxable income of over $400,000 or couples making over $450,000.

The reform wouldn't affect the overwhelming majority of Americans, whose retirement savings (if they have any) are far more modest — the average Roth was worth just $39,108 at the end of 2018.

“Incentives in our tax code that help Americans save for retirement were never intended to enable a tax shelter for the ultra-wealthy," Neal said earlier this year. “We must shut down these practices."

Should the bill pass, it could have profound implications for PayPal founder Thiel, whose gargantuan Roth stunned lawmakers, spurring Neal to vow a crackdown. Thiel wouldn't owe any tax up front and no early withdrawal penalties would apply, but he'd be required to move billions out of the tax-advantaged account. And any gains on investments made with that money would no longer be sheltered from taxes, potentially creating hundreds of millions of dollars in future tax liabilities.

The great appeal of the Roth IRA is that once money is inside it, any income generated — such as capital gains from selling a stock, investment interest or dividends — is tax-free, as long as the holder waits until he or she is 59 and a half to withdraw it. (Thiel hits that mark in 2027.) In a traditional IRA, by contrast, money that's withdrawn counts as income and is taxed.

The IRA reforms are part of a slate of proposals designed to eliminate loopholes and boost tax rates on rich individuals and corporations.

Several of the changes address revelations contained in The Secret IRS Files, a series of ProPublica stories published this year that are exploring the ways the very richest Americans avoid paying taxes. Usually such efforts remain secret, but ProPublica has obtained a trove of tax records covering thousands of the country's richest people. The records reveal not only the diverse array of tax-avoidance techniques used by the rich, but also that some of the very richest have consistently found ways to avoid taking income, so they pay little or no taxes, even as their wealth multiplied to historic levels.

The current House plan falls short of President Joe Biden's more ambitious proposals to combat wealth inequality through the tax code. But experts say it would significantly increase the taxes paid by high-income Americans. Among other things, it would all but eliminate a major deduction created by President Donald Trump's 2017 tax law that, as ProPublica recently reported, showered massive tax breaks on some of the richest families in the country.

Given the stakes for a small group of wealthy and powerful Americans, it's unclear whether the IRA proposal, along with the rest of the package, will become law. It must pass the House and make it through the Senate, where it will likely need the votes of all 50 Democratic senators to pass. Capitol Hill staffers say the bill remains fluid and provisions could still be cut, added or modified.

For now, however, the proposal has alarmed those who stand to lose the most. Three tax lawyers told ProPublica that clients with giant IRAs have reached out to them, worried about the potential reforms. Already a lawyer and an accountant are offering a paid webinar that pitches strategies to help owners of large IRAs get around the proposed rules.

A spokesman for Thiel didn't respond to a request for comment.

The tax proposals have drawn opposition from Republicans on Capitol Hill. “This is very bad news for the U.S. economy," said Ways and Means Committee ranking member Rep. Kevin Brady, R-Texas, in an interview this week.

A budget analyst at the anti-tax Heritage Foundation specifically criticized the IRA reform proposals as “stifling retirement savings and decreasing the economy-wide investment in future productivity."

Neal announced his plans to curb the size of mega IRAs in July following ProPublica's story revealing how Thiel and other billionaires had amassed giant retirement accounts using techniques largely unavailable to most taxpayers. Other wealthy investors with giant retirement accounts included financier Michael Milken, Warren Buffett and executives from investment giant Bain Capital.

Neal joined his Senate counterpart, Ron Wyden, D-Ore., who had been pushing for reform of mega IRAs for years without much support from his peers.

With a multibillion-dollar tax-free account on the line, a wealthy investor might try to keep his income below the $400,000 threshold set by the proposal. In Thiel's case, it's not clear if that would be possible, given that he's long reported tens of millions of dollars on his tax returns from capital gains, interest and dividends on investments he holds outside of his Roth IRA. And even if he has to withdraw billions from his Roth, he will never have to pay taxes on years of growth inside the account.

ProPublica has previously reported that several billionaires have had very little taxable income in certain years, including Jeff Bezos and Elon Musk. Musk did not respond to questions for that story and Bezos' representatives would not designate someone to accept questions related to that story.

The proposal would also add restrictions in areas that congressional investigators have said are ripe for abuse by the wealthy: The owners of IRAs would be barred from using the accounts to either purchase certain nonpublic investments or buy stakes in companies in which they are an officer.

Thiel launched his Roth IRA by purchasing so-called founder's shares of PayPal in 1999 when he was chairman and CEO of the company, according to tax records and a financial statement Thiel included in his application for residency in New Zealand. Securities and Exchange Commission records show he bought 1.7 million shares for $1,700, or a tenth of a penny per share. (The maximum contribution to a Roth that year was $2,000.) PayPal later told the SEC the shares were sold “below market value."

The practice has become popular among the founders of Silicon Valley companies, who tuck shares of their startups into IRAs, often after buying them at bargain prices. This can sidestep IRA contribution limits and generate massive tax-free growth if the value of their companies explodes.

The proposal would also shut down the so-called backdoor Roth. ProPublica found that billionaires like Buffett had taken advantage of a maneuver, known as a conversion, that allows the wealthy to sidestep existing income caps to create a Roth IRA. In a conversion, the owner of a traditional IRA can transform it into a Roth by paying one-time tax on the money. Once the account is converted into a Roth, no additional income taxes are ever due. The new provision would bar conversions for individuals with income over $400,000, though the ban would not go into effect until 2031 for budgetary reasons. (Buffett previously didn't respond to questions about his IRA.)

The proposal also has implications for the holders of giant traditional IRAs, who could suddenly owe a hefty tax bill. Money withdrawn from a traditional IRA counts as taxable income. Milken, the 1980s junk bond king who went to prison for fraud and was later pardoned by Trump, had traditional IRAs valued at $509 million at the end of 2018, according to tax records. If the law passed, Milken could face a tax bill of roughly $100 million, depending on the current size of his account. A spokesperson for Milken declined to comment.

Separately, another part of the bill would tackle the generous business income deductions granted by Trump's 2017 tax law.

As ProPublica previously reported, the drafting of the deduction was marked by last-minute changes and a rush of lobbying dollars from corporations and the superrich. The result of its passage, confidential tax records show, was a windfall for billionaires such as media mogul Michael Bloomberg, packaging tycoons Dick and Liz Uihlein, and the Bechtel family, owners of a global engineering and construction firm.

Bloomberg received a deduction of roughly $183 million in 2018 alone as a result of the provision, while the Uihleins netted around $118 million.

Under the House proposal, the deduction would be capped at $400,000 for an individual and $500,000 for a couple, virtually wiping it out for the very rich. If such a cap had been in place in 2018, for example, the Uihleins would have gotten a deduction worth just $500,000 instead of $118 million. A competing Senate proposal unveiled by Wyden in July would go even further. A spokesperson for the Uihleins declined to comment on the proposed reforms.

On a broader level, the House plan would spell a significant tax hike on Americans earning more than $400,000, raising their individual income tax rates as well as bumping up the corporate tax rate, the first such hikes in a decade.

But despite the proposal's ambition, critics say it misses a rare opportunity to capture the massive untaxed wealth of some of the richest individuals in history, including Bezos and Musk, who have often found ways to keep their income low.

As ProPublica reported, they and other billionaires have managed to pay little to no taxes in the past. Some have done so by pursuing the so-called buy, borrow, die strategy. By holding on to his Tesla stock but borrowing money to finance his lifestyle, Musk, for example, can avoid income that is taxable under current law. If he sticks to this strategy till death, the income tax liability on his fortune will evaporate for his heirs.

Some Democrats and policymakers had aspired to even bolder tax code changes that would have targeted the stratospheric increases in the ultrawealthy's riches. One idea, championed by Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., would be to levy a so-called wealth tax on billionaires' overall holdings. Another, pushed by Wyden, would tax the annual gains billionaires logged, even if they hadn't sold the assets. Both ideas foundered, with concerted opposition from billionaires and skittishness from Democratic centrists. Some critics point out that wealth taxes have often failed in other countries. And many policymakers believe it would be too logistically difficult to measure assets properly and enforce such a sweeping rule on gains.

How Trump's tax law opened a loophole that let executives cash in big time

This story was first published by ProPublica, a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

In the months after President Donald Trump signed the Tax Cuts and Jobs Act in December 2017, some tax professionals grew giddy as they discovered opportunities for their clients inside a law that already slashed rates for corporations and wealthy individuals.

At a May 2018 conference of financial advisers, one wealth planner told the room that a key provision of the new law “leaves a gaping hole in the tax code." As he put it, “The goal by the end of the presentation today is to make you guys the bus drivers, or the truck drivers, to drive right through that hole with your clients."

Among the tax-saving opportunities offered by the law: Taxes on profits from certain types of businesses were cut dramatically, while the rate on salaries those businesses paid was reduced only slightly.

That created an alluring opportunity. People who were both owners and employees of a company could make the same amount of money but change how they label it, by lowering their salaries and in turn increasing the company's profits, which they shared in. That would reduce their tax bill by moving money from a high-tax category to a lower one: Wages are taxed at a top rate of 37% plus an additional 3.8% Medicare levy, while profits, under the new law, are taxed at a top rate of 29.6% (with no Medicare tax). Proponents of this provision claimed it would foster increased investment in American businesses (economists say it's too early to determine whether that's true). But even before the bill passed, prominent tax academics warned, in an article titled “The Games They Will Play," that the tax break would be abused.

Their fears appear to have materialized. Secret IRS data shows multiple instances in which salaries for top executives and owners suddenly and inexplicably dropped in the first year after the Trump tax cut, reducing their tax bills even as their companies appeared to thrive. The mysterious pay cuts played out across industries, from logistics companies to real estate firms to makers of bathtubs, and among executives of varying degrees of prominence. The salary for one construction firm executive dropped from more than $4 million in 2017 to $105,000 in 2018.

The wages for car accessory manufacturer David MacNeil, whose WeatherTech floor mats are featured in a Super Bowl ad each year, fell from $68 million in 2017 to $47 million in 2018.

The salary of Jeffrey Records, CEO of Oklahoma City-based MidFirst Bank, plummeted from $8.6 million to $1.8 million.

And the wages of Dick Uihlein, the Republican megadonor and chairman of shipping supplies behemoth Uline, sank from $5.1 million to $2.1 million.

It's impossible to say how much money was reclassified as a result of the new law, but consider this: The loophole already existed, in much smaller form, before the Trump tax overhaul. A government report in 2009 estimated the U.S. Treasury was losing billions to this strategy. Back then, an owner could save the Medicare tax by counting a dollar as profits rather than salary. But after the Trump law, the tax savings roughly tripled, to about 11%.

The revelations about the wage maneuvers come from a trove of IRS records obtained by ProPublica covering thousands of the wealthiest Americans. Previous articles in “The Secret IRS Files" series have detailed how the wealthy avoid paying taxes legally, including a story last week exploring the massive benefits the Trump tax overhaul provided billionaires.

The sudden shifts in compensation revealed in the tax returns of wealthy business owners show how they may be gaming federal law to further slash their taxes. They also highlight how, unlike most Americans, whose taxes are automatically taken out of each paycheck, wealthy business owners have a menu of avoidance techniques afforded to them by the tax code.

The tax benefits of shifting wages to profits can be significant. MacNeil, for example, saved an estimated $8 million in the first two years, according to a ProPublica analysis of the IRS records.

MacNeil defended his wage drop and said he used the tax savings to create more jobs: “You want me investing in my country — my fellow Americans? Get out of my pocket."

ProPublica analyzed years of wage and profit data and found that for each of the companies named in this story, company profits rose even as wages were cut.

Unlike publicly traded corporations, private companies are not required to publicly report profits, salaries for top executives or their rationales for compensation decisions. But experts who spoke to ProPublica said that, if audited, these executives would have to justify why the value of their labor plunged in a given year. The secret tax data does not answer that question.

Taking an unreasonably low salary in order to avoid taxes is illegal. But the IRS' definition of “reasonable" is vague, and the vast majority of business owners will likely never have to justify the salary cuts. Only a tiny fraction of such companies have their salaries examined by the IRS. Karen Burke, a tax law professor at the University of Florida, said, “For a business owner, there's every incentive to do this and every reason to believe you'll get away with it."

David MacNeil enjoys being the boss. A table reserved for him at the cafeteria of his sprawling production plant has a placard that warns: “Don't even think about sitting here." He compliments one of his 1,700 employees about the company pickup truck he's driving, then adds, “It's mine." As he walks among the whirring machines pumping out his custom car mats, he revels in the fact that he built a flourishing manufacturing empire without offshoring, creating hundreds of jobs.

“This is why they give us a tax break," he said, “so we can make shit happen."

After ProPublica contacted him, MacNeil invited two reporters for a daylong tour of his factory complex in Bolingbrook, Illinois. A former car salesman, he founded WeatherTech, a top U.S. manufacturer of car accessories, in 1989 and now regularly generates $100 million in annual profit. MacNeil owns a super-yacht, a private jet, a Florida equestrian estate and a collection of antique cars.

He describes himself as “the kind of man America needs, a man that believes in the great American worker." As he led the tour of his plant, he took his phone out to read emails from employees praising his generosity and showed photos of himself removing trash from the ocean in his free time.

MacNeil backed Trump, donating $1 million to his inauguration and hundreds of thousands to Republican candidates and causes. Trump's tax law would have cut the magnate's taxes no matter what. But the IRS records indicate MacNeil may have taken steps to further boost those savings.

For 16 years, the records show, MacNeil's wages climbed every year: from $1.1 million in 2008 to $10.1 million in 2012 and almost $68 million in 2017. But in 2018, that trend suddenly reversed. He cut his salary to $47 million. Then in 2019, he slashed it even more aggressively, bringing it down to $17 million — 75% lower than two years earlier.

MacNeil's CEO title hadn't changed. He hadn't stepped back. “I bust my ass seven days a week," he said.

As MacNeil's salary fell, the company's profits, which are taxed at a lower rate, surged. In 2018, after four years in which profits hovered around $100 million a year, they suddenly jumped to $121 million. The $21 million increase mirrored the amount that MacNeil lowered his wages that year.

With his (higher-taxed) wages dropping and his (lower-taxed) profits rising, MacNeil avoided an estimated $8 million in taxes.

MacNeil first said he was unaware that his wages had been cut 75% until ProPublica asked him about it. “I had no idea," he said, asserting the decision was made by his accountants. Later, MacNeil told ProPublica that his wage decrease stemmed from his decision to begin reinvesting almost all of his profits back into the company, leaving him less cash to pay himself in wages.

Experts told ProPublica that increased capital investments by an owner could help justify lower wages, if they result in the owner having less cash left over.

Still, the tax data shows MacNeil's profits soaring during the years his wages dropped. The data does not indicate how much money MacNeil put back into the business. Asked to provide specific figures outlining his annual cash flow and reinvestment, MacNeil declined.

MacNeil also cited the vagueness of the IRS' definition of “reasonable compensation." Most important, he said, the estimated $8 million in taxes he avoided by dropping his wages allowed him to buy an $8 million machine that would generate many multiples of that in tax revenue in the years to come, because it would make his business more profitable.

In a series of text messages in the days that followed, MacNeil continued to defend himself, telling a ProPublica reporter that he didn't understand “the real world" and “it's time to grow up and get a real job."

“Break it up anyway you want, you saw there was a half billion dollars in investment with your own eyes," he wrote. “We've paid hundreds and hundreds of millions of dollars in taxes since 2012. How much have you paid? Chump change for sure. Enjoy!"

MacNeil's company, like all of the ones discussed in this article, is organized as a pass-through, a tax structure that is quite common but not popularly understood.

To understand pass-throughs, it's first useful to know how their corporate cousin, the C corporation, is taxed. Most large publicly traded companies, the ExxonMobils and Nikes of the world, are C corporations. When these companies end the year, they must pay the IRS corporate income tax on any profits they have earned. Shareholders receive money, and then owe taxes, only if they decide to sell their holding at a gain or if the companies issue a dividend.

Most businesses in the U.S. are not C corporations, but pass-throughs. They include everything from a small corner deli to a hedge fund to a multinational construction company. Most are privately held. When one of these businesses makes a profit, they do not pay the corporate tax. Instead, that money “passes through" directly to the owner and is reflected on the owners' personal tax returns. It is therefore taxed only once, and individual income tax rates apply.

One popular type of pass-through is called an S corporation, named after the section in the tax code. They were created in the Eisenhower era as an option for small businesses who wanted to face only a single layer of tax. Since then, many large companies have structured themselves as S corporations for the tax benefits they can bring.

The IRS requires that S corporations pay reasonable salaries — they “should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions" — but the agency has been vague about what those words mean. Factors cited for what makes a salary reasonable include the individual's training and experience, job responsibilities and what comparable businesses pay for similar roles.

To offer more clarity, the IRS has publicly cited court cases it fought against business owners. In one, from 2001, a Pennsylvania veterinarian took all of his compensation as business income, paying himself no wages even though he spent more than 30 hours a week doing surgeries and other tasks. The veterinarian lost and was forced to pay back taxes.

In another case, an Iowa accountant was paid a salary of $24,000 a year, while taking profits of about $200,000. The accountant, David Watson, specialized in advising clients on tax issues involving pass-through companies. The court ruled against Watson, forcing him to pay back taxes and penalties, after it found that the market rate for his services at the time would have been over $90,000.

The issue has at times become a more public flashpoint. Former Democratic presidential nominee John Edwards was criticized for taking a small salary from the law practice he owned, and former Republican House Speaker Newt Gingrich took heat for doing the same from companies he created that profit from his speeches and other appearances. More recently, The Wall Street Journal reported that Joe Biden exploited the tactic in the years before he became president with his book and speech income. Gingrich, Edwards and Biden have all defended their handling of their tax affairs.

A 2009 report from the Government Accountability Office estimated that in 2003 and 2004, about 13% of S corporations paid artificially low wages, resulting in about $3 billion in lost tax revenue. IRS officials complained to investigators that making the case that a salary is artificially low can be difficult and time consuming. From 2006 to 2008, the IRS examined only 0.5% of S corporations, and in less than a fourth of those cases was compensation looked at. By 2019, the audit rate for S corporations had fallen even lower, to 0.2%.

As the Trump tax cut was being hammered out, lobbyists for industry groups and specific companies pushed to make sure they were eligible. Engineering, real estate and manufacturing were granted the deduction. Lawyers and companies performing “financial services," for example, were not.

Despite that, banks lobbied successfully to be eligible for the deduction. One of the banks that pushed for that eligibility was MidFirst. That year, even as the CEO's salary dropped from $8.6 million to $1.8 million, his share of the profits jumped more than $16 million. In 2019, Records' salary rebounded to $6.5 million, but it remained lower than it had been in the year before the Trump tax law.

Representatives for Records declined to answer questions for this article.

Dick and Liz Uihlein also appear to have benefited. The co-founders of Uline gave millions to support Sen. Ron Johnson, the Wisconsin Republican who became the champion of the pass-through provision in the Trump tax overhaul.

Before the law passed, the salaries for the Uihleins had fluctuated. But in 2018 they dropped dramatically, from a total of $10.5 million to $4.2 million. Their wages had not been that low in more than a decade.

The business reasons for the pay cut are not clear from the available records, and a spokesman for the Uihleins declined to answer questions from ProPublica. Dick remained chairman, and Liz was president. Liz Uihlein said publicly in 2020 that the couple was still heavily involved in running the company.

Their business was booming in the year their wages fell. Profits rose from about $721 million in 2017 to $937 million in 2018, ProPublica's analysis of the company's tax data shows. The company remained North America's leading distributor of shipping and packaging supplies. “Business is great," Uline's Chief Human Resources Officer Gil De Las Alas told the Kenosha News in November 2018. “We just keep growing, growing, growing."

Secret IRS files reveal how much the ultrawealthy gained by shaping Trump's 'big, beautiful tax cut'

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

Series: The Secret IRS Files

Inside the Tax Records of the .001%

In November 2017, with the administration of President Donald Trump rushing to get a massive tax overhaul through Congress, Sen. Ron Johnson stunned his colleagues by announcing he would vote “no."

Making the rounds on cable TV, the Wisconsin Republican became the first GOP senator to declare his opposition, spooking Senate leaders who were pushing to quickly pass the tax bill with their thin majority. “If they can pass it without me, let them," Johnson declared.

Johnson's demand was simple: In exchange for his vote, the bill must sweeten the tax break for a class of companies that are known as pass-throughs, since profits pass through to their owners. Johnson praised such companies as “engines of innovation." Behind the scenes, the senator pressed top Treasury Department officials on the issue, emails and the officials' calendars show.

Within two weeks, Johnson's ultimatum produced results. Trump personally called the senator to beg for his support, and the bill's authors fattened the tax cut for these businesses. Johnson flipped to a “yes" and claimed credit for the change. The bill passed.

The Trump administration championed the pass-through provision as tax relief for “small businesses."

Confidential tax records, however, reveal that Johnson's last-minute maneuver benefited two families more than almost any others in the country — both worth billions and both among the senator's biggest donors.

Dick and Liz Uihlein of packaging giant Uline, along with roofing magnate Diane Hendricks, together had contributed around $20 million to groups backing Johnson's 2016 reelection campaign.

The expanded tax break Johnson muscled through netted them $215 million in deductions in 2018 alone, drastically reducing the income they owed taxes on. At that rate, the cut could deliver more than half a billion in tax savings for Hendricks and the Uihleins over its eight-year life.

But the tax break did more than just give a lucrative, and legal, perk to Johnson's donors. In the first year after Trump signed the legislation, just 82 ultrawealthy households collectively walked away with more than $1 billion in total savings, an analysis of confidential tax records shows. Republican and Democratic tycoons alike saw their tax bills chopped by tens of millions, among them: media magnate and former Democratic presidential candidate Michael Bloomberg; the Bechtel family, owners of the engineering firm that bears their name; and the heirs of the late Houston pipeline billionaire Dan Duncan.

Usually the scale of the riches doled out by opaque tax legislation — and the beneficiaries — remain shielded from the public. But ProPublica has obtained a trove of IRS records covering thousands of the wealthiest Americans. The records have enabled reporters this year to explore the diverse menu of options the tax code affords the ultrawealthy to avoid paying taxes.

The drafting of the Trump law offers a unique opportunity to examine how the billionaire class is able to shape the code to its advantage, building in new ways to sidestep taxes.

The Tax Cuts and Jobs Act was the biggest rewrite of the code in decades and arguably the most consequential legislative achievement of the one-term president. Crafted largely in secret by a handful of Trump administration officials and members of Congress, the bill was rushed through the legislative process.

As draft language of the bill made its way through Congress, lawmakers friendly to billionaires and their lobbyists were able to nip and tuck and stretch the bill to accommodate a variety of special groups. The flurry of midnight deals and last-minute insertions of language resulted in a vast redistribution of wealth into the pockets of a select set of families, siphoning away billions in tax revenue from the nation's coffers. This story is based on lobbying and campaign finance disclosures, Treasury Department emails and calendars obtained through a Freedom of Information Act lawsuit, and confidential tax records.

For those who benefited from the bill's modifications, the collective millions spent on campaign donations and lobbying were minuscule compared with locking in years of enormous tax savings.

A spokesperson for the Uihleins declined to comment. Representatives for Hendricks didn't respond to questions. In response to emailed questions, Johnson did not address whether he had discussed the expanded tax break with Hendricks or the Uihleins. Instead, he wrote in a statement that his advocacy was driven by his belief that the tax code “needs to be simplified and rationalized."

“My support for 'pass-through' entities — that represent over 90% of all businesses — was guided by the necessity to keep them competitive with C-corporations and had nothing to do with any donor or discussions with them," he wrote.

By the summer of 2017, it was clear that Trump's first major legislative initiative, to “repeal and replace" Obamacare, had gone up in flames, taking a marquee campaign promise with it. Looking for a win, the administration turned to tax reform.

“Getting closer and closer on the Tax Cut Bill. Shaping up even better than projected," Trump tweeted. “House and Senate working very hard and smart. End result will be not only important, but SPECIAL!"

At the top of the Republican wishlist was a deep tax cut for corporations. There was little doubt that such a cut would make it into the final legislation. But because of the complexity of the tax code, slashing the corporate tax rate doesn't actually affect most U.S. businesses.

Corporate taxes are paid by what are known in tax lingo as C corporations, which include large publicly traded firms like AT&T or Coca-Cola. Most businesses in the United States aren't C corporations, they're pass-throughs. The name comes from the fact that when one of these businesses makes money, the profits are not subject to corporate taxes. Instead, they “pass through" directly to the owners, who pay taxes on the profits on their personal returns. Unlike major shareholders in companies like Amazon, who can avoid taking income by not selling their stock, owners of successful pass-throughs typically can't avoid it.

Pass-throughs include the full gamut of American business, from small barbershops to law firms to, in the case of Uline, a packaging distributor with thousands of employees.

So alongside the corporate rate cut for the AT&Ts of the world, the Trump tax bill included a separate tax break for pass-through companies. For budgetary reasons, the tax break is not permanent, sunsetting after eight years.

Proponents touted it as boosting “small business" and “Main Street," and it's true that many small businesses got a modest tax break. But a recent study by Treasury economists found that the top 1% of Americans by income have reaped nearly 60% of the billions in tax savings created by the provision. And most of that amount went to the top 0.1%. That's because even though there are many small pass-through businesses, most of the pass-through profits in the country flow to the wealthy owners of a limited group of large companies.

Tax records show that in 2018, Bloomberg, whom Forbes ranks as the 20th wealthiest person in the world, got the largest known deduction from the new provision, slashing his tax bill by nearly $68 million. (When he briefly ran for president in 2020, Bloomberg's tax plan proposed ending the deduction, though his plan was generally friendlier to the wealthy than those of his rivals.) A spokesperson for Bloomberg declined to comment.

Johnson's intervention in November 2017 was designed to boost the bill's already generous tax break for pass-through companies. The bill had allowed for business owners to deduct up to 17.4% of their profits. Thanks to Johnson holding out, that figure was ultimately boosted to 20%.

That might seem like a small increase, but even a few extra percentage points can translate into tens of millions of dollars in extra deductions in one year alone for an ultrawealthy family.

The mechanics are complicated but, for the rich, it generally means that a business owner gets to keep an extra 7 cents on every dollar of profit. To understand the windfall, take the case of the Uihlein family.

Dick, the great-grandson of a beer magnate, and his wife, Liz, own and operate packaging giant Uline. The logo of the Pleasant Prairie, Wisconsin, firm is stamped on the bottom of countless paper bags. Uline produced nearly $1 billion in profits in 2018, according to ProPublica's analysis of tax records. Dick and Liz Uihlein, who own a majority of the company, reported more than $700 million in income that year. But they were able to slash what they owed the IRS with a $118 million deduction generated by the new tax break.

Liz Uihlein, who serves as president of Uline, has criticized high taxes in her company newsletter. The year before the tax overhaul, the couple gave generously to support Trump's 2016 presidential campaign. That same year, when Johnson faced long odds in his reelection bid against former Sen. Russ Feingold, the Uihleins gave more than $8 million to a series of political committees that blanketed the state with pro-Johnson and anti-Feingold ads. That blitz led the Milwaukee Journal Sentinel to dub the Uihleins “the Koch brothers of Wisconsin politics."

Johnson's campaign also got a boost from Hendricks, Wisconsin's richest woman and owner of roofing wholesaler ABC Supply Co. The Beloit-based billionaire has publicly pushed for tax breaks and said she wants to stop the U.S. from becoming “a socialistic ideological nation."

Hendricks has said Johnson won her over after she grilled him at a brunch meeting six years earlier. She gave about $12 million to a pair of political committees, the Reform America Fund and the Freedom Partners Action Fund, that bought ads attacking Feingold.

In the first year of the pass-through tax break, Hendricks got a $97 million deduction on income of $502 million. By reducing the income she owed taxes on, that deduction saved her around $36 million.

Even after Johnson won the expansion of the pass-through break in late 2017, the final text of the tax overhaul wasn't settled. A congressional conference committee had to iron out the differences between the Senate and House versions of the bill.

Sometime during this process, eight words that had been in neither the House nor the Senate bill were inserted: “applied without regard to the words 'engineering, architecture.'"

With that wonky bit of legalese, Congress smiled on the Bechtel clan.

The Bechtels' engineering and construction company is one of the largest and most politically connected private firms in the country. With surgical precision, the new language guaranteed the Bechtels a massive tax cut. In previous versions of the bill, construction would have been given a tax break, but engineering was one of the industries excluded from the pass-through deduction for reasons that remain murky.

When the bill, with its eight added words, took effect in 2018, three great-great-grandchildren of the company's founder, CEO Brendan Bechtel and his siblings Darren and Katherine, together netted deductions of $111 million on $679 million in income, tax records show.

And that's just one generation of Bechtels. The heirs' father, Riley, also holds a piece of the firm, as does a group of nonfamily executives and board members. In all, Bechtel Corporation produced around $2.3 billion of profit in 2018 alone — the vast majority of which appears to be eligible for the 20% deduction.

Who wrote the phrase — and which lawmaker inserted it — has been a much-discussed mystery in the tax policy world. ProPublica found that a lobbyist who worked for both Bechtel and an industry trade group has claimed credit for the alteration.

In the months leading up to the bill's passage in 2017, Bechtel had executed a full-court press in Washington, meeting with Trump administration officials and spending more than $1 million lobbying on tax issues.

Marc Gerson, of the Washington law firm Miller & Chevalier, was paid to lobby on the tax bill by both Bechtel and the American Council of Engineering Companies, of which Bechtel is a member. At a presentation for the trade group's members a few weeks after Trump signed the bill into law, Gerson credited his efforts for the pass-through tax break, calling it a “major legislative victory for the engineering industry." Gerson did not respond to a request for comment.

Bechtel's push was part of a long history of lobbying for tax breaks by the company. Two decades ago, it even hired a former IRS commissioner as part of a successful bid to get “engineering and architectural services" included in one of President George W. Bush's tax cuts.

The company's lobbying on the Trump tax bill, and the tax break it received, highlight a paradox at the core of Bechtel: The family has for years showered money on anti-tax candidates even though, as The New Yorker's Jane Mayer has written, Bechtel “owed almost its entire existence to government patronage." Most famous for being one of the companies that built the Hoover Dam, in recent years it has bid on and won marquee federal projects. Among them: a healthy share of the billions spent by American taxpayers to rebuild Iraq after the war. The firm recently moved its longtime headquarters from San Francisco to Reston, Virginia, a hub for federal contractors just outside the Beltway.

A spokesperson for Bechtel Corporation didn't respond to questions about the company's lobbying. The spokesperson, as well as a representative of the family's investment office, didn't respond to requests to accept questions about the family's tax records.

Brendan Bechtel has emerged this year as a vocal critic of President Joe Biden's proposal to pay for new infrastructure with tax hikes.

“It's unfair to ask business to shoulder or cover all the additional costs of this public infrastructure investment," he said on a recent CNBC appearance.

As the landmark tax overhaul sped through the legislative process, other prosperous groups of business owners worried they would be left out. With the help of lobbyists, and sometimes after direct contact with lawmakers, they, too, were invited into what Trump dubbed his “big, beautiful tax cut."

Among the biggest winners during the final push were real estate developers.

The Senate bill included a formula that restricted the size of the new deduction based on how much a pass-through business paid in wages. Congressional Republicans framed the provision as rewarding businesses that create jobs. In effect, it meant a highly profitable business with few employees — like a real estate developer — wouldn't be able to benefit much from the break.

Developers weren't happy. Several marshaled lobbyists and prodded friendly lawmakers to turn things around.

At least two of them turned to Johnson.

“Dear Ron," Ted Kellner, a Wisconsin developer, and a colleague wrote in a letter to Johnson. “I'm concerned that the goal of a fair, efficient and growth oriented tax overhaul will not be achieved, especially for private real estate pass-through entities."

Johnson forwarded the letter from Kellner, a political donor of his, to top Republicans in the House and Senate: “All, Yesterday, I received this letter from very smart and successful businessmen in Milwaukee," adding that the legislation as it stood gave pass-throughs “widely disparate, grossly unfair" treatment.

House Ways and Means Committee Chairman Kevin Brady, R-Texas, responded with a promise to do more: “Senator — I strongly agree we should continue to improve the pass-through provisions at every step. You are a great champion for this." Congress is not subject to the Freedom of Information Act, but Treasury officials were copied on the email exchange. ProPublica obtained the exchange after suing the Treasury Department.

Kellner got his wish. In the final days of the legislative process, real estate investors were given a side door to access the full deduction. Language was added to the final legislation that allowed them to qualify if they had a large portfolio of buildings, even if they had small payrolls.

With that, some of the richest real estate developers in the country were welcomed into the fold.

The tax records obtained by ProPublica show that one of the top real estate industry winners was Donald Bren, sole owner of the Southern California-based Irvine Company and one of the wealthiest developers in the United States.

In 2018 alone, Bren personally enjoyed a deduction of $22 million because of the tax break. Bren's representatives did not respond to emails and calls from ProPublica.

His company had hired Wes Coulam, a prominent Washington lobbyist with Ernst & Young, to advocate for its interests as the bill was being hammered out. Before Coulam became a lobbyist, he worked on Capitol Hill as a tax policy adviser for Utah Sen. Orrin Hatch.

Hatch, then the Republican chair of the Senate Finance Committee, publicly took credit for the final draft of the new deduction, amid questions about the real estate carveout. Hatch's representatives did not respond to questions from ProPublica about how the carveout was added.

ProPublica's records show that other big real estate winners include Adam Portnoy, head of commercial real estate giant the RMR Group, who got a $14 million deduction in 2018. Donald Sterling, the real estate developer and disgraced former owner of the Los Angeles Clippers, won an $11 million deduction. Representatives for Portnoy and Sterling did not respond to questions from ProPublica.

Another gift to the real estate industry in the bill was a tax deduction of up to 20% on dividends from real estate investment trusts, more commonly known as REITs. These companies are essentially bundles of various real estate assets, which investors can buy chunks of. REITs make money by collecting rent from tenants and interest from loans used to finance real estate deals.

The tax cut for these investment vehicles was pushed by both the Real Estate Roundtable, a trade group for the entire industry, and the National Association of Real Estate Investment Trusts. The latter, a trade group specifically for REITs, spent more than $5 million lobbying in Washington the year the tax bill was drafted, more than it had in any year in its history.

Steven Roth, the founder of Vornado Realty Trust, a prominent REIT, is a regular donor to both groups' political committees.

Roth had close ties to the Trump administration, including advising on infrastructure and doing business with Jared Kushner's family. He became one of the biggest winners from the REIT provision in the Trump tax law.

Roth earned more than $27 million in REIT dividends in the two years after the bill passed, potentially allowing him a tax deduction of about $5 million, tax records show. Roth did not respond to requests for comment, and his representatives did not accept questions from ProPublica on his behalf.

Another carveout benefited investors of publicly traded pipeline businesses. Sen. John Cornyn, a Texas Republican, added an amendment for them to the Senate version of the bill just before it was voted on.

Without his amendment, investors who made under a certain income would have received the deduction anyway, experts told ProPublica. But for higher-income investors, a slate of restrictions kicked in. In order to qualify, they would have needed the businesses they're invested in to pay out significant wages, and these oil and gas businesses, like real estate developers, typically do not.

Cornyn's amendment cleared the way.

The trade group for these companies and one of its top members, Enterprise Products Partners, a Houston-based natural gas and crude oil pipeline company, had both lobbied on the bill. Enterprise was founded by Dan Duncan, who died in 2010.

The Trump tax bill delivered a win to Duncan's heirs. ProPublica's data shows his four children, who own stakes in the company, together claimed more than $150 million in deductions in 2018 alone. The tax provision for “small businesses" had delivered a windfall to the family Forbes ranked as the 11th richest in the country.

In a statement, an Enterprise spokesperson wrote: “The Duncan family abides by all applicable tax laws and will not comment on individual tax returns, which are a private matter." Cornyn's office did not respond to questions about the senator's amendment.

The tax break is due to expire after 2025, and a gulf has opened in Congress about the future of the provision.

In July, Senate Finance Chair Ron Wyden, D-Ore., proposed legislation that would end the tax cut early for the ultrawealthy. In fact, anyone making over $500,000 per year would no longer get the deduction. But it would be extended to the business owners below that threshold who are currently excluded because of their industry. The bill would “make the policy more fair and less complex for middle-class business owners, while also raising billions for priorities like child care, education, and health care," Wyden said in a statement.

Meanwhile, dozens of trade groups, including the Chamber of Commerce, are pushing to make the pass-through tax cut permanent. This year, a bipartisan bill called the Main Street Tax Certainty Act was introduced in both houses of Congress to do just that.

One of the bill's sponsors, Rep. Henry Cuellar, D-Texas, pitched the legislation this way: “I am committed to delivering critical relief for our nation's small businesses and the communities they serve."

Campaign to rein in mega IRA tax shelters gains steam in Congress

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

Series: The Secret IRS Files

Inside the Tax Records of the .001%

Two members of Congress who have long been responsible for shaping federal laws on retirement savings are considering major reforms after ProPublica exposed how the ultrawealthy are turning retirement accounts into gargantuan tax shelters.

Rep. Richard Neal, the Massachusetts Democrat who chairs the powerful House Ways and Means Committee, told ProPublica that he has directed the committee to draft a bill that “will stop IRAs from being exploited."

The committee is considering “limiting the total amount of money that can be saved in tax-preferred retirement accounts," Neal said in a written statement.

“Incentives in our tax code that help Americans save for retirement were never intended to enable a tax shelter for the ultra-wealthy," Neal said. “We must shut down these practices."

In addition, Sen. Ben Cardin, a Maryland Democrat who has co-authored a series of changes to retirement savings laws in the past decade, is also in favor of reforms that his spokesperson said would “prevent the type of massive abuses exemplified by the ultra-wealthy."

But provisions lurking deep in unrelated legislation currently wending its way through Congress could undermine those efforts.

In its June 24 story, ProPublica detailed that one technique investors have used to sock hundreds of millions of dollars — even billions — away in their IRAs is to fill the accounts with bargain-basement shares in companies that are not publicly traded, so they have no clear valuation. Then, when the companies go public or are sold, their accounts explode in value — with all of the gains tax-free.

Cardin's spokesperson told ProPublica that the senator now supports banning such transactions, which would be one of the biggest reforms in decades to the rules governing the accounts. The Internal Revenue Service recommended a similar change more than a decade ago. Congressional investigators wrote that an IRS team in 2009 had suggested “limiting the types of investments IRAs can make to publicly traded or otherwise marketable securities with a readily ascertainable fair market value."

Cardin is “considering reforms, such as banning the use of IRAs to purchase nonpublic investments," calling it “a good starting point while protecting IRAs for every day Americans to save for their retirement," his spokesperson wrote in an email.

The growing interest in changing the system gives momentum to the plans of Oregon Sen. Ron Wyden, chair of the Senate Finance Committee, who last month declared that he was eyeing a similar crackdown on giant IRAs.

Wyden's move came after ProPublica detailed how the Roth IRA, a ho-hum retirement account designed to help the middle class save for retirement, had been hijacked by the ultrawealthy, who used it to create gigantic onshore tax shelters. Tax records obtained by ProPublica revealed that Peter Thiel, a co-founder of PayPal and an early investor in Facebook, had a Roth IRA worth $5 billion as of 2019. As long as Thiel waits until he is six months shy of his 60th birthday, he will be able to withdraw his fortune tax-free.

Thiel made an end run around the strict limit on what can be put into a Roth IRA by purchasing so-called founders' shares of PayPal in 1999 when he was chairman and CEO of that company, according to tax records and a financial statement Thiel included in his application for citizenship in New Zealand. Securities and Exchange Commission records show Thiel bought 1.7 million shares for $1,700 — a price of a tenth of a penny per share. PayPal later told the SEC that the shares were among those sold at “below fair value."

When PayPal took off and Thiel's shares ballooned in value, he sold them and used the proceeds — still within his Roth — to invest in other startups, including Facebook, long before they went public, according to court records and Thiel's financial statement filed in New Zealand. He never had to make another contribution to his Roth again. The account's stratospheric growth all stemmed from a private stock deal available only to a handful of people.

This is the type of nonpublic IRA investment that Cardin is considering banning. A spokesperson for Thiel did not respond to requests for comment.

But this new appetite for reining in the accounts may be too late to slow contrary bipartisan legislation already rolling through Congress. Buried deep inside two complex and sweeping bills — each more than 140 pages long — are provisions that could make it harder for the IRS to crack down on the ultrawealthy who dodge tax rules.

Those bills, paradoxically, are co-sponsored by Cardin and Neal, two of the lawmakers who are now calling for reining in giant retirement accounts.

The House and Senate bills were introduced before ProPublica launched its ongoing series last month exposing how the country's richest citizens sidestep the nation's income tax system. ProPublica has obtained IRS tax return data on thousands of the wealthiest people in the U.S., covering more than 15 years, allowing it to conduct an unprecedented examination of how the ultrawealthy employ tricks to avoid taxes in ways that most Americans cannot.

The bills are being pitched as helping ordinary Americans save for retirement, including automatic enrollment of workers in employer-sponsored retirement plans. But they also include perks for retirement and financial industries, such as relaxing certain rules in ways that are seen as a boon for insurers.

Deciphering the handouts is nearly impossible without a background in the intricacies of retirement plan tax laws and the help of experts. The bills hide critical changes in language most laypeople would never understand. For instance, a key piece of the Senate bill reads, “Paragraph (2) of subsection (e) of section 408 is repealed." But the scope of that change only makes sense when layered with this: “Section 4975(c)(3) is amended by striking 'the account ceases to be an individual retirement account by reason of the application of section 408(e)(2)(A) or if'."

ProPublica had to reverse-engineer the meaning of that series of numbers and letters to determine that it would take away one of the most potent weapons in the IRS' arsenal: the ability to strip an entire IRA of its tax-favored status.

Complicated IRS and Department of Labor rules prohibit IRA investments that involve conflicts of interest or self-dealing. That can be a particular concern with nontraditional IRA investments, such as purchases of real estate or of shares of companies that are not publicly traded. Under the current law, if the IRS determines that a retirement account has engaged in a prohibited transaction, the agency can blow up the entire account — an event that Warren Baker, a tax attorney whose practice focuses on IRAs, likens to “Armageddon." The whole account then ceases to be an IRA, and the owner has to pay income taxes on it.

The two bills propose defusing that bomb. In the House bill, the tax benefits would only be stripped from the part of the account involved in the forbidden transaction. The Senate bill would loosen the rules even more, applying a 15% excise tax on the part of the account involved in the prohibited transaction without blowing up the account. A spokesperson for Cardin said, “The penalty jumps to 100% if not corrected in a timely manner."

Still, someone who violates the rules suddenly would have a “massive long-term upside benefit" of tax-free growth, Baker said, while “your downside risk is a penalty that is smaller than the capital gains rates," the federal tax on the income that's generated when stocks or other assets are sold.

Bob Lord, a tax attorney and tax counsel to Americans for Tax Fairness, said he has represented clients who settled Roth IRA cases because the threat of losing the tax benefits of their entire accounts was “leverage the IRS had." He was stunned when he read the bills and saw that power stripped from the IRS.

“These changes will lead to more aggressive transactions that lodge greater wealth in Roth IRAs, with less risk if the IRS audits," Lord said.

The proposed Senate bill, experts say, makes another concession to IRA owners who might be tempted to dodge the rules. Under current law, an IRA account holder who violates rules is never totally in the clear. That's because the current statute of limitations for violations is a bit of a gray area, experts say. The IRS, “could virtually go back indefinitely," said Jeffrey Levine, a CPA and chief planning officer at Buckingham Wealth Partners.

The Senate bill proposes stopping the clock at three years. Yet, it can take more than three years for some nontraditional investments to balloon. If the IRS were to discover something amiss, under the bill's proposed statute of limitations it would be too late to act.

“For the little guy this makes all the sense in the world," Levine said. But for the ultrawealthy with huge accounts and squadrons of lawyers, he said, the changes could incentivize bad behavior. “Someone with all the resources in the world could say, 'I'll do this now that my risk-reward calculation is different and I'm looking at getting through three years and then I'm kind of home free.' That, you know, is a real boon for those who want to take advantage of the system."

The House bill is co-sponsored by Neal and Rep. Kevin Brady, a Texas Republican, and the Senate bill is co-sponsored by Cardin and Sen. Rob Portman, an Ohio Republican.

A spokesperson for Portman defended the legislation, which she said was “borne out of contact from our constituents — including innocent middle class savers who had their retirements wrecked by innocent and minor errors." ProPublica asked aides to Portman and Cardin for examples, but neither provided any. A Cardin spokesperson wrote in an email that “there usually is not litigation when this happens, and non-public examples are confidential taxpayer information."

In a joint statement, the offices of Portman and Cardin defended the Senate bill, saying it would help small businesses offer 401(k) retirement plans, expand access to savings for low-income Americans and “allow people who have saved too little to set more aside for retirement." The new legislation, they added, included measures to prevent Americans from inadvertently losing their IRAs while “implementing safeguards to prevent abuse."

Brady's communications director asked for questions in writing, then did not respond.

A staffer with Neal's Ways and Means Committee said the House bill had broad support and touted many provisions, including the automatic enrollment of employees in retirement plans, a national lost-and-found to locate retirement plans from prior jobs and a requirement that employers let certain long-term, part-time workers enroll in 401(k) plans.

The House bill, she noted, doesn't repeal the prohibited transaction rules; it limits the impact to the inappropriate purchase. She described Neal as “very committed to maintaining these important rules and believes that full sanctions should apply when violated."

Here's how to file your state and federal taxes for free in 2021

by Kristen Doerer for ProPublica, Justin Elliott and Karim Doumar

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

Series: The ProPublica Free Tax Guide

Free, Fact-Checked Tax Information. That's All.

Most Americans are eligible for free tax-preparation services, but the truly free options can be hard to find. If you're not careful, you could end up using a service that says it's free but demands payment after you've spent time entering your information.

Now that the IRS haspushedthe deadline for 2020 taxes to May 17, you have even more time to make sure you're using the service that's right for you.

How do you file online for free?

If you make less than$72,000 a year, you can find free tax filing options at the IRS Free File webpage.

Here are Free File options from TurboTax, TaxSlayer and others. (H&R Block has left the Free File program since last year.)

Each site has its own eligibility requirements, so be sure to find one that will be free for you.

It can take a bit of effort to find an option that fits your situation. Try using the IRSlookuptoolto find the right one. Most of the options provide tax prep for both federal and state returns.

Best for: People who make less than the income cap and want a convenient and easy way to file online.

If you make more than $72,000 a year, you may have access to free options offered by several commercial tax prep companies, like Intuit (TurboTax), H&R Block or TaxAct.

But buyer beware: Some companies use a variety of tactics to try to wring money out of you, often only throwing up a paywall after you've gone through the trouble of inputting most of your information.

The widely advertised “free" options are typically only really free based on which tax forms you need to file. Which forms are free and which will trigger a demand for a fee depends on the company. So read the fine print before you decide.

  • Here is the list of forms supported by H&R Block's “free online" version.
  • Here is the list of forms supported by TaxAct's “free" offer. Click the tab labeled “forms."
  • Here is the list of forms supported by TurboTax “Free Edition."

Credit Karma also offers a free tax filing service for “all supported forms," but the company tries to monetize your personal tax data by using it to target you with advertising.

Best for: People who don't qualify for Free File but have income only from a standard job and perhaps a bank account, and who want to file online.

If you're in the military, you can use MilTax, a service provided by the Department of Defense that uses a version of H&R Block's tax software. It is available for free to active-duty service members as well as those in the National Guard or the reserves, as well as their families. There are no income or tax form restrictions. There are also free, in-person options to get tax help if you are in the military or family — see the section below.

You can also get free advice from a professional who understands tax issues specific to the military. The phone number is 800-342-9647, or you can live chat with them.

Best for: People in the military, guard or reserves and their families.

How can I get personal tax help for free?

You can qualify for the IRS'Volunteer Income Tax Assistance (VITA) program if you:

  • Make less than around $57,000 a year, OR
  • Live with a disability, OR
  • Speak limited English.

You can qualify for the IRS'Tax Counseling for the Elderly program if you:

  • Are at least 60 years old.

These programs match you with IRS-certified volunteers across the country who can help with free basic income tax preparation and electronic filing. You can use the Volunteer Income Tax Assistance locator tool or call 800-906-9887 to find someone to help you. Keep in mind that some locations may require an appointment.

Best for: People who are confused by the tax process and want someone to help walk them through the process.

If you're in the military and want individual tax help, you can get freein-person tax help on many U.S. military bases worldwide. Military.com's base guide is a good place to start.

Best for: People in the military and their families who want advice from someone who knows the ins and outs of military tax filing.

Why is TurboTax charging me?

If you make less than $39,000 a year (or $72,000 if you're in the military) and TurboTax is telling you it costs money to file, you are probably using the wrong version of TurboTax. Don't worry, there is a way to access the truly free version.

As ProPublica reported in 2019, TurboTax purposely hid its Free File product and directed taxpayers to a version where many had to pay, called the TurboTax Free Edition. If you clicked on this “FREE Guaranteed" option, you could input a lot of your information, only to be told toward the end of the process that you need to pay.

You can still accessTurboTax's Free File version. This version is offered through the Free File agreement.

TurboTax's misleadingadvertisingandwebsite designdirected users to more expensive versions of the software, even if they qualified to file for free. After our stories published, some people demanded and got refunds. Intuit, the maker of TurboTax, faces several investigations and lawsuits over this practice. The company has denied wrongdoing, and has moved to acquire other free tax-preparation companies like Credit Karma.

Following ProPublica's reporting, the IRS announced an update to its agreement with the tax-preparation companies. Among other things, the update bars the companies from hiding their Free File offerings from Google search results. It also makes it so each company has to name their Free File service the same way, using the format: IRS Free File Program delivered by [COMPANY NAME].

What's the difference between TurboTax's “Free Guaranteed" and IRS Free File Delivered by TurboTax?

TurboTax Free Edition is not always free. It has only been free for tax returns that the company defines as “simple." That often means people with student loans and freelance income actually have to pay to file. Look for Intuit's “IRS Free File Program delivered by TurboTax." This year, you are eligible if you:

  • Make less than $39,000 a year, OR
  • Make less than $72,000 a year and serve in the military.

What is Free File, and who is the Free File Alliance?

The Free File Alliance is actually a group of tax companies that — contrary to the name — is in the business of charging people to help them file their taxes. They spent a lot of money to make sure that the IRS didn't develop its own free tax filing service that would compete with what they have to offer. As part of the new Free File Alliance deal, the IRS is now able to offer a competing service, but it's not doing so this year.

The Free File Alliance companies have agreed to offer free tax filing for a certain percentage of the population based on income. Head to the IRS website to see which option is the best for you. These are the companies in the alliance:

  • 1040NOW Corp.
  • ezTaxReturn.com
  • FileYourTaxes
  • Free Tax Returns
  • Intuit
  • OnLine Taxes
  • TaxACT
  • TaxHawk
  • TaxSlayer

About this guide:

ProPublica has reported extensively about taxes, the IRS Free File program and the IRS. Specifically, we've covered the ways in which the for-profit tax preparation industry — companies like Intuit (TurboTax), H&R Block and Tax Slayer — has lobbied for the Free File program, then systematicallyundermined it with evasive search tactics and confusing design. These companies also work to fill search engine results with tax “guides" that sometimes route users to paid products. This guide is not personalized tax advice, and you should speak to a tax professional about your specific tax situation.

Susan Collins backed down from a fight with private equity. Now they’re underwriting her reelection

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

In late November 2017, Senate Republicans were racing to secure the votes for their sweeping tax overhaul. With no Democrats supporting the bill and even some Republicans wavering, Sen. Susan Collins, the Maine Republican, found herself with enormous leverage.

The day before the vote, she offered an amendment to make the legislation, which lavished tax cuts on corporations and the wealthy, more equitable. It expanded a tax credit to make child care more affordable. To pay for it, she took aim at a tax break cherished by the private equity industry.

Then Collins backed down. The day after she introduced it, as the Senate voted on the bill, a Republican Senate aide told a Treasury Department official that Collins was “no longer offering her amendment," according to emails obtained by ProPublica through a Freedom of Information Act lawsuit. Her retreat was a significant victory for Senate Majority Leader Mitch McConnell. Collins put aside her opposition and voted for the bill, which passed 51-49.

Her turnabout has been one of the mysteries surrounding the $1.5 trillion tax bill, which slashed the corporate rate. The new emails and interviews shed light on how quickly Collins climbed down from her amendment proposal and how the industry maneuvered to preserve the break in the new law, which remains President Donald Trump's most important legislative achievement.

Nearly three years later, Collins is facing a tough reelection battle and the private equity industry has become her most reliable source of donations. She has gotten more than half a million dollars in campaign contributions from the private equity industry this cycle, more than any other senator, according to the Center for Responsive Politics, which tracks political donations.

What's more, Steve Schwarzman, the billionaire chairman and chief executive of the private equity giant Blackstone, has given $2 million to a super PAC backing her. (Schwarzman, a major Republican donor, has also given $20 million to a super PAC supporting Collins and other Republican Senate candidates.) The failure of Collins' amendment likely saved Schwarzman alone tens of millions of dollars in taxes, according to tax experts.

Annie Clark, a Collins campaign spokeswoman, said Collins secured other significant changes to the bill. The amendment cutting carried interest stood no chance because it would've required 60 votes to pass if the Senate had voted on it, she said.

“Given the opposition to the amendment at the time — not only from Republicans, but from Democrats as well — it would certainly have failed," Clark said in a statement.

A Schwarzman spokeswoman said in a statement, “Steve has long supported Senator Collins because of her independence, hard work and integrity. He does not closely follow all of her specific policy positions."

The carried interest loophole, as its critics, including Collins, have called it, has long been the target of reform efforts.

The tax break is especially lucrative for the private equity industry, which invests in non-public businesses. A major way that executives at private equity firms like Blackstone make money is by taking a share of profits when the companies they invest in are sold.

The debate over carried interest centers on how this money should be taxed: as an investment return for private equity executives or a bonus that the firm's clients pay for good performance. Today, it's treated like an investment and taxed at a lower capital gains rate. If it were counted as a bonus, it would be taxed like part of the executives' salaries, at the higher ordinary income tax rate. That discount — currently around 20 percentage points — in what Wall Street executives owe to the government quickly adds up to tens of billions of dollars.

When Trump became president and Republicans started pursuing an overhaul of the tax code, private equity had reason to be worried. The party had a long wish list of tax cuts but a limited number of ways to pay for them without increasing the deficit by more than Senate rules allowed, $1.5 trillion over 10 years. Eliminating carried interest, as Trump had proposed, was one of them.

And the tax break had faced years of opposition. The Obama administration made an ultimately unsuccessful attempt to raise the carried interest tax rate, an effort that Schwarzman famously compared to the Nazis invading Poland. (He later apologized for the analogy.)

Trump himself repeatedly complained about carried interest during his presidential campaign. “These are guys that shift paper around and they get lucky," he said in 2015. “They are paper-pushers. They make a fortune. They pay no tax. It's ridiculous, OK?"

To blunt the effort, the American Investment Council, the industry's Washington trade group, proposed a concession it hoped would mollify lawmakers who might consider killing the loophole. AIC pitched House Republicans on modestly extending the amount of time that hedge funds, private equity firms and others must hold onto investments to qualify for the tax break, according to three people familiar with the matter.

That's exactly what happened. Rep. Kevin Brady, R-Texas, the chairman of the House Ways and Means Committee, proposed tweaking carried interest rather than eliminating it. The holding period would change from one year to three years — a change that tax experts say does little to close the loophole.

“It's laughable. Almost nobody will end up paying any additional tax. Tax planners have a million ways to Sunday to try to avoid it, some more legitimate than others, and the IRS is notoriously inept at auditing these types of issues," said Gregg Polsky, a former corporate tax lawyer who is now a professor at University of Georgia law school.

But the loophole still faced a threat. AIC had identified Collins as a senator who might come after carried interest, according to two people familiar with the matter, and on Nov. 30, Collins spoke on the Senate floor to pitch a handful of amendments to the bill.

One priority, she said, was to alleviate the burden on poor families of the costs of care for children or elderly relatives. And to raise money for this new government subsidy, she would roll back Wall Street's carried interest tax break.

“These are the lowest income families who need help the most in paying for child care or care for a dependent, elderly parent or grandparent or other relative; yet virtually none of them qualify for the credit," Collins said. “To pay for making the child and adult dependent care credit refundable, my amendment would close the carried interest loophole, a tax reform that the president has endorsed."

Collins' staff had reached out to academics who specialize in the arcane details of carried interest to help them craft the legislative language, according to one Senate tax aide. She settled on upping the holding period from three years, as Brady has proposed, to eight — which, experts say, would have significantly eroded the tax break's value.

As the Senate was moving toward passing the bill the day after Collins pitched her amendment, Drew Maloney, the Treasury Department's assistant secretary for legislative affairs, emailed the chief of staff to Sen. Rob Portman, R-Ohio, asking what had “happened with carried interest."

“Collins no longer offering her amendment," replied Portman's chief of staff, Mark Isakowitz.

Collins “[c]ame up with a different pay for to fund her medical expense deduction so she isn't offering it any more," Isakowitz continued.

It's unclear exactly what Isakowitz meant; he appears to have conflated Collins' amendment to expand the child and dependent tax credit — for which closing the carried interest loophole was a “pay for," Washington jargon for a revenue-generating measure that offsets a tax cut — with another amendment she proposed retaining a tax deduction for medical expenses and lowering the income threshold necessary to claim it.

Maloney declined to comment. So did Isakowitz, who now runs Google's Washington office.

It's not clear exactly why Collins dropped her last-minute, long-shot attempt to kill carried interest. Three other amendments that Collins introduced on the same day made it into the bill, including an expansion of the medical expense tax deduction and preserving taxpayers' ability to deduct up to $10,000 in state and local income taxes from their federal tax returns.

Clark, Collins' spokeswoman, said the senator continues to support closing the carried interest loophole to pay for an expansion of the child and dependent care tax credit, but the lack of support for it at the time meant the amendment “had absolutely no chance" of making it into the bill.

“Any claim that Senator Collins didn't pursue this amendment because of any lobbying effort is completely false," she said. “Anyone who knows her knows that she always does what she thinks is right. Any insinuation to the contrary is false — and an insult to her integrity."

Maloney, who, internal Treasury emails show, kept close tabs on the carried interest issue throughout 2017, left the administration six months after the tax overhaul passed to take a job running the American Investment Council, the private equity trade group. He later hired Brad Bailey, another top Treasury Department official, to work as one of the trade group's lobbyists.

Another Treasury Department official, Jared Sawyer, has lobbied for AIC since leaving the administration to take a job at a lobbying firm. And Eli Miller, the chief of staff to Treasury Secretary Steve Mnuchin, who was deeply involved in the tax overhaul, left government last year to become a government relations executive at Blackstone.

While Collins' Democratic opponent, Sara Gideon, has outraised Collins' campaign, Wall Street billionaires have stepped up to boost the pro-Collins 1820 PAC, which can accept unlimited donations and has spentheavily on TV and other ads. Schwarzman is the group's single-largest donor. Behind him is Ken Griffin of Chicago hedge fund giant Citadel, who has chipped in $1.5 million.

Citadel's lobbying disclosures show the firm lobbied Congress on the carried interest issue in 2017, as well as the broader tax bill. A Citadel spokesman pointed to Griffin's comments several years ago on carried interest.

“Almost all the income that we generate is short term in nature," Griffin said in 2013. “So my tax rate is pretty much the highest federal marginal rate. So I don't have a lot of skin in the game on this issue from my personal vantage point but I have an interest in this as a matter of principle."

Griffin then said he believed the current favorable tax treatment of carried interest should be maintained.

Gideon has no similar outside group supporting her and her campaign has received $242,000 in donations from people who work in private equity, according to the Center for Responsive Politics. A narrow favorite in the race, Gideon has attacked Collins for her support of the tax overhaul.

In December 2017, when it became clear that, despite the president's promises, the tax bill would not meaningfully address carried interest, Axios' Mike Allen asked Gary Cohn, the director of Trump's National Economic Council, what he would change about the bill if he could change one thing.

“We would've cut carried interest," he replied. “We hit opposition in that big white building with the dome at the other end of Pennsylvania Avenue every time we tried."

When Allen pressed Cohn to explain what had happened, he alluded to the power that hedge funds, private equity and venture capital wield in Washington. “Look, the reality of this town is that constituency has a very large presence in the House and the Senate, and they have really strong relationships on both sides of the aisle," he said.

Now the industry is preparing to fight the same battle again. Joe Biden has proposed raising capital gains taxes for those who make at least $1 million a year to equal the income tax rate, effectively eliminating the carried interest loophole for the richest Americans.

Biden's plan to kill carried interest does not appear to have dented his support from private equity.

Jon Gray, Blackstone's president, hosted a fundraiser for Biden in July and introduced him at another one earlier this year. Tony James, another top Blackstone executive, hosted one in June. (Gray and James have also given a combined $2.25 million to the Senate Majority PAC, which supports Democratic Senate candidates including Gideon.) And Alex Katz, a former aide to Senate Minority Leader Chuck Schumer who now works in government relations for Blackstone, is raising money for Biden's transition effort.

The Biden campaign declined to comment.

The Justice Department unleashes prosecutors to potentially intervene in the election

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

The Department of Justice has weakened its long-standing prohibition against interfering in elections, according to two department officials.

Avoiding election interference is the overarching principle of DOJ policy on voting-related crimes. In place since at least 1980, the policy generally bars prosecutors not only from making any announcement about ongoing investigations close to an election but also from taking public steps — such as an arrest or a raid — before a vote is finalized because the publicity could tip the balance of a race.

But according to an email sent Friday by an official in the Public Integrity Section in Washington, now if a U.S. attorney's office suspects election fraud that involves postal workers or military employees, federal investigators will be allowed to take public investigative steps before the polls close, even if those actions risk affecting the outcome of the election.

The email announced “an exception to the general non-interference with elections policy." The new exemption, the email stated, applied to instances in which “the integrity of any component of the federal government is implicated by election offenses within the scope of the policy including but not limited to misconduct by federal officials or employees administering an aspect of the voting process through the United States Postal Service, the Department of Defense or any other federal department or agency."

Specifically citing postal workers and military employees is noteworthy, former DOJ officials said. But the exception is written so broadly that it could cover other types of investigations as well, they said.

Both groups have been falsely singled out, in different ways, by President Donald Trump and his campaign for being involved in voter fraud. Trump has repeatedly attempted to delegitimize ballots sent through the postal service, just as the country experiences increased voting by mail spurred by the coronavirus pandemic. He has also raised the specter that the ballots of military members, among whom he enjoys broad support, might be suppressed.

The DOJ and the White House did not immediately respond to requests for comment.

Experts who reviewed the revision said they were concerned it could be exploited to help the DOJ bolster Trump's campaign.

“It's unusual that they're carving out this exception," said Vanita Gupta, the former head of the DOJ Civil Rights Division under President Barack Obama. “It may be creating a predicate for the Justice Department to make inflated announcements about mail-in vote fraud and the like in the run-up to the election."

In a break from long-standing practice last month, a U.S. attorney in Pennsylvania publicly announced that the DOJ was investigating whether local elections officials illegally discarded nine mail-in military ballots. Attorney General William Barr personally briefed Trump on the case before it was publicly announced, The Washington Post reported. Trump later cited it as an example to support his claims of widespread mail-in voter fraud, a false assertion Barr has has helped amplify. It's not clear where the federal probe stands, but Pennsylvania's top elections official said early indications point to an error, not fraud.

The new policy carveout, Gupta said, could be designed to both justify the widely criticized Pennsylvania announcement and open the door for more such moves in the coming weeks.

Justin Levitt, a former deputy assistant attorney general in the DOJ's civil rights division, also expressed concern that the department could be encouraging prosecutors to make more public announcements about incomplete investigations, as they did in the Pennsylvania case.

“It alarms me that the DOJ would want to authorize more of the same in and around the election," he said. “It's incredibly painful for me to say, but given what we've seen recently, Americans shouldn't trust DOJ announcements right now."

The Friday email was sent to a group of dozens of prosecutors around the country known as district election officers. They monitor election procedures and take complaints on Election Day from the public about alleged crimes and serve as the federal points of contact for local election officials.

For decades, the work of federal prosecutors has been guided by a strict policy of non-interference in elections.

A 281-page document titled “Federal Prosecution of Election Offenses" is the handbook for district election officers. The latest edition, from 2017, warns against launching public investigations, without approval granted for extraordinary cases, into alleged fraud before an election is over.

Such a step, the handbook says, “runs the obvious risk of chilling legitimate voting and campaign activities. It also runs the significant risk of interjecting the investigation itself as an issue, both in the campaign and in the adjudication of any ensuing election contest."

One current DOJ official told ProPublica that prosecutors have historically been warned not to allow themselves to be dragged into candidate disputes. “That's what they drill into us: the policy of non-interference and never, ever, ever announce an investigation," the official said.

The Justice Department may have violated Attorney General Barr’s own policy memo

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

When the Justice Department recently publicized an ongoing investigation into potentially improperly discarded Trump ballots, critics accused it of violating long-standing agency policy against interfering in an election.

But the unusual decision to publicly detail the Pennsylvania case may also have run afoul of guidelines that Attorney General William Barr himself issued to federal prosecutors this year, according to a memo obtained by ProPublica.

In May, Barr wrote a directive to all Justice Department employees imploring them to be “particularly sensitive to safeguarding the Department's reputation for fairness, neutrality, and non-partisanship" when it comes to election-related crimes.

“Partisan politics," he wrote, “must play no role in the decisions of federal investigators or prosecutors regarding any investigations or criminal charges. Law enforcement officers and prosecutors may never select the timing of public statements (attributed or not), investigative steps, criminal charges, or any other action in any matter or case for the purpose of affecting any election, or for the purpose of giving an advantage or disadvantage to any candidate or political party."

Nevertheless, last month Barr's Justice Department issued a press release announcing an investigation into whether local elections officials illegally discarded nine mail-in military ballots in Pennsylvania. The announcement of an open investigation was highly unusual. Even more abnormal was that the press release specified that at least seven of those ballots were for President Donald Trump.

While the motivation of the Pennsylvania press release is unclear, Barr had personally briefed Trump on the matter before the announcement, The Washington Post subsequently reported, citing an anonymous source. The president raised it in a media interview and then DOJ's Pennsylvania office announced the investigation.

Then, the Trump campaign quickly jumped on the Pennsylvania case to bolster those claims.

“BREAKING: FBI finds military mail-in ballots discarded in Pennsylvania. 100% of them were cast for President Trump. Democrats are trying to steal the election," a campaign official tweeted.

Justin Levitt, a former deputy assistant attorney general in the DOJ's civil rights division, said the Pennsylvania press release was “flatly inconsistent" with Barr's memo “and shamefully so."

“There's absolutely no legitimate law enforcement reason I know of to mention who the ballots were cast for: They were either dealt with properly or not properly," he said. “And if there's no good reason, it leaves only the most likely bad reason: that the identity of the candidate was revealed for partisan political purposes."

Some experts did not agree . Samuel Buell, a former federal prosecutor who is now a professor at Duke Law School, said Barr could argue that “any public announcement about a ballot investigation complies with [the memo] because the language is so broad."

Barr, he said, could say the “purpose" of the Pennsylvania announcement was not to affect the outcome of the election or support a particular candidate, but some other non-prohibited motivation like “protecting the vote."

The Barr memo closelymirrored election-year guidance that previous attorneys general sent out under both the Obama and George W. Bush administrations. Barr himself said at his Senate confirmation hearings last year that the election policies were in place because the incumbent party has “their hands on the levers of the law enforcement apparatus of the country, and you do not want it used against the opposing political party."

Asked whether the Pennsylvania announcement ran afoul of the agency's election policies, Justice Department spokeswoman Kerri Kupec responded: “No." She declined to elaborate.

The U.S. attorney overseeing the case is David Freed, a former Republican nominee for Pennsylvania state attorney general who was nominated for his current role by Trump in 2017. In a publicly released letter, Freed said he was detailing initial findings despite an ongoing investigation “based on the limited amount of time before the general election and the vital public importance of these issues."

A second memo obtained by ProPublica, issued in August by Corey Amundson, chief of the DOJ's Public Integrity Section, was even more explicit.

In it, Amundson reiterated the Justice Department's long-standing policy in election fraud cases: “Overt criminal investigative measures should not ordinarily be taken in matters involving alleged fraud in the manner in which votes were cast or counted until the election in question has been concluded."

The memo was addressed to the Attorney General Advisory Committee, a group of U.S. attorneys that advise the attorney general.

The policy Amundson cites appears to make an exception for extraordinary cases. But it seems unlikely that would apply to the case in Pennsylvania. That involved only nine ballots, which appear to have been discarded by a sole contract employee. The motivation may have been an innocuous attempt to follow Pennsylvania rules barring ballots sent back without the proper envelope.

Current and former Justice Department officials told ProPublica that, even without the memos from top agency officials including Barr, the Pennsylvania press release violated long-standing department policy. They explained that prosecutors not only should not announce that they are investigating, but that they should be slow even to start an election-sensitive investigation during the campaign. Such an investigation is so sensitive, an opposing candidate could use it to smear his or her opponent.

“That's what they drill into us: the policy of non-interference and never, ever, ever announcing an investigation," one official said. “That's why the thing in Pennsylvania is bonkers, completely bonkers."

A spokeswoman for Freed declined to comment.

Barr has amplified Trump's attempt to discredit mail-in voting before, claiming falsely that there is widespread fraud.

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