When pressed about releasing his individual tax returns during a past Republican debate,
Donald Trump said he wouldn’t release them until the IRS finishes its audit. “You’re in the midst of negotiating and talking to the IRS,” Trump stated. “Your lawyers would never allow you to do that.”
Is there anything legally stopping Trump from publicly releasing his tax returns? Absolutely not.
Would any experienced tax professional representing Trump in an IRS audit advise him to publicly release his tax returns during the audit? Absolutely not.
So Why Not Just Disclose the Returns Under Examination? The tax professionals that Trump is working with most likely have their hands full responding to numerous informal and formal detailed inquiries by the IRS “Wealth Squad” audit team assigned to his case. Neither the IRS team nor Trump’s tax team likely want the additional scrutiny brought on by a public disclosure during the examination (the IRS’ name for Audit). However, depending on the status of the current examination, it would seem highly unlikely an open IRS examination involving multiple tax years and possibly numerous entities relating to any wealthy individual would be concluded before the general election in November.
The IRS Wealth Squad. The IRS maintains a specialized, experienced group of examiners solely focused on conducting audits of high-income/high-wealth taxpayers – the Global High Wealth Industry Group of the IRS Large Business and International division (commonly referred to as the IRS “Wealth Squad”).
In announcing the creation of the Wealth Squad, the IRS stated “For a variety of reasons – including valid business reasons – many high wealth individuals make use of sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences. Many of these arrangements are entirely above board. Others mask aggressive tax strategies.” Recently, the U.S. Court of Appeals for the Eleventh Circuit noted “It is no surprise that a knowledgeable tax attorney would use numerous legal entities to accomplish different objectives. This does not make them illegitimate. Unfortunately such ‘maneuvering’ is apparently encouraged by our present tax laws and codes.”
Although there are many sophisticated IRS representatives, few could realistically expect to individually unravel the intricacies of a well-designed business and estate plan possibly employing multiple domestic and foreign entities and investment arrangements. The Wealth Squad is designed to allow the IRS to better understand the sophisticated financial, business and investment arrangements of the taxpayer by engaging a team of specialists to take a unified, holistic look at the entire web of inter-related entities controlled by a high wealth individual to discover the entire economic picture of the enterprise and to assess the tax compliance of that overall enterprise.
In a Wealth Squad examination, the IRS deploys a team of highly capable, experienced examination specialists which include technical advisers to provide industry or issue specialized tax expertise, flow-through entity specialists, international examiners, economists to identify economic trends within returns, valuation experts and others. The Wealth Squad routinely draws on additional examination resources from throughout the IRS organization. The IRS recently even engaged a private law firm for assistance during a corporate examination.
The Wealth Squad pursues a comprehensive approach to auditing high-income taxpayers by expanding the examinations beyond the individual income tax return to include examinations of related and controlled entities. A typical Wealth Squad examination consists of a key case, generally the taxpayer’s Form 1040, and returns of related entities. These entities may include partnerships, trusts, S corporations, C corporations, private foundations, etc. Due to the complexity of most high-income taxpayers’ returns, it generally takes more time and resources than a traditional individual audit. Complex, detailed examinations of wealthy taxpayers are not easily concluded; neither the taxpayer nor the IRS examination teams have any desire to unnecessarily prolong the audit process. However, experienced IRS examination teams conducting Wealth Squad audits rarely conclude an examination until they are satisfied with the proposed resolution.
During such audits, examiners make detailed demands for information and supporting documentation that in turn generate detailed responses from the taxpayer’s representatives, which often generate additional detailed requests for information from the IRS. These examinations typically look at 2-3 years of returns for the individual and many, if not all, of the related entities. Sometimes, the audit can expand to the returns of other investors involved in the related entities as well. These examinations often take years to complete and as current tax returns are filed, the examiner often seeks to at least review reportable positions within the currently filed returns as part of the ongoing examination process.
Determining “Where and How” to Report a Transaction. Wealthy taxpayers often engage teams of sophisticated tax, business, and estate planning lawyers, tax professionals, and other advisers to oversee their business activities and to legitimately minimize their potential tax liabilities. For a wealthy individual with complex, diversified investments, the individual tax return, by itself, will typically only reflect net items flowing through from numerous other related entities.
Detailed IRS audits are actually anticipated by the teams of professionals typically representing wealthy individuals. In this regard, the tax advisors are often significantly involved in most every transaction from the initial consideration through to “where and how” the reportable items are set forth within the appropriate tax return for the individual and/or the related entities. Responsibility for proper reporting and disclosure is shared between the tax representatives and the individual taxpayer although, in complex returns, the individual is rarely directly involved in these discussions. Given the complexities of the Internal Revenue Code and other tax authorities, few non-tax experienced professionals would realistically be capable of discerning “where and how” to report transactions often associated with wealthy individuals and their related entities.
What’s in Trump’s Tax Returns? Teams of sophisticated tax advisers were likely engaged throughout Trump’s career to assure the absence of any “bombshell” within the returns. His returns might actually be somewhat unremarkable but for the fact they are the returns of Donald Trump. For wealthy individuals, individual tax returns sometimes only provide a brief financial overview linked to numerous other conclusions and entities. To fully understand the financial status of Trump, one would likely need to see returns for multiple years, the work-papers for the individual returns and the returns for numerous related entities, something that is unlikely to happen.
So, what is in Trump’s Returns? Likely information prepared by many very well-qualified tax professionals who were quite aware the general public might be looking at the returns at some future date. It’s unlikely an accurate overall financial picture will surface by simply reviewing his returns. He likely pays taxes at a lesser rate than many of us given the nature of his real estate and similar investments being subjected to lower tax rates than salaries earned by the rest of us. Certainly, his tax professionals have not advised him to overpay his taxes.
“No-Change” Audit Results of the Super-Rich. Overall, returns for wealthy taxpayers are audited by the IRS at a significantly higher rate than taxpayers at lower income levels. For FY2014, the IRS audited 16.22% (24.16% for FY 2013) of returns for individuals having $10,000,000 or more in adjusted gross income and 10.53% (15.98% for FY 2013) for individuals having $5 million to $10 million in adjusted gross income but only audited 0.86% of all returns filed by individuals (with the vast majority of individual returns being conducted remotely via correspondence between the IRS and the taxpayer). Why does the IRS audit a significantly higher percentage of wealthy vs. less-wealthy taxpayers? Quite simply. . .”because that’s where the money is,” not because of “politics or religion”.
Following these intensive, time-consuming processes, the Wealth Squad closed 41% of their FY 2014 examinations accepting the returns as filed (a ‘no-change” examination). The “no-change” rate was 37% for FY 2013. The “no-change” rate for other examination groups within the IRS Large Business and International division (groups generally auditing large corporate taxpayers) varied between 20% to 33% for FY 2014 and 20% to 38% for FY 2013.
Is Trump Worth More or Less Than He States? He is likely worth far more than us but may be worth far less than the approximately $10 billion he wants us to believe. However, alone, his tax returns are unlikely to provide an accurate picture beyond an estimate of $4.5billion.
STAY TUNED FOLKS!
So, what do you think about Trump’s claim of not being “allowed” to show his tax returns?
Or, what do you think “The Donald” himself?
Bruce – Your Host at The Tax Nook
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