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On April 3, House Ways and Means Committee Chair Richard Neal wrote to the IRS requesting six years of President Trump’s personal income tax returns as well as the returns for eight of Trump’s more than 500 business entities. Neal wants to determine whether the IRS is auditing the President in a fair and impartial manner. And while Neal’s request is an important step to fulfill his committee’s oversight responsibilities, he likely will need to see earlier personal returns and more business returns to complete his task.
The Tax Code authorizes Neal to request tax information held by the IRS. He asked for Trump’s six most recent years of personal tax returns (including Trump’s 2018 return, which probably has not been filed), and recent returns of some of Trump’s business entities. These returns will give a partial glimpse of how the IRS has audited Trump, but they won’t provide a full picture.
The IRS can take many years to complete a complex audit and may not have completed their audits for the years requested. Take, for example, Trump’s 2013 personal tax return. A taxpayer with a complicated return that reports income from various pass-through entities would typically have requested an extension to file by October 15, 2014. The IRS might not open an audit for another year, and the process could take a year or two to resolve—or even longer.
In very complicated matters, the IRS examiner may seek technical advice from the IRS national office, which adds substantially more time. If the examiner issued a notice of proposed adjustment, a taxpayer can appeal administratively within the IRS, which could take another year or more to resolve. Often, the IRS audits two or three years at a time, which can delay some years and accelerate others.
In theory, the IRS must resolve each audit within three years after a taxpayer files a return. But in practice the parties agree to extend the statute of limitations, often indefinitely. As a result, the IRS may just now be completing its audit of the earliest of the personal returns Neal is requesting--and may not even have begun its audits of Trump’s most recent returns.
This general time table is consistent with what we have been told about the status of Trump’s audits. In March of 2016, Trump’s lawyers said the IRS had closed audits of Trump’s 2003 through 2008 tax returns but audits for 2009 and afterwards remained open. Some of these audits may have been completed during Trump’s first two years of office. But Neal may find that most, if not all, of the audits of Trump’s 2013 through 2018 have not been completed.
In my view, Neal should have requested all returns open for audit while Trump has been in office (most likely his returns for 2009 forward). Under this approach, Neal would have asked for 10 years of returns. HR 1, the House’s political reform bill, would require presidents and presidential candidates to publicly release 10 years of returns in the future. Even Trump expected Neal to request for 10 years of his tax returns.
Neal appropriately widened the scope of his request to both Trump’s personal and business returns. For a taxpayer such as Trump, personal tax returns may “only provide a brief financial overview linked to numerous other conclusions and entities,” as now-IRS Commissioner Charles Rettig famously explained in 2016. Thus, Neal asked for the returns of Trump’s five most significant business entities, which control hundreds of Trump’s other businesses.
However, while the returns of these five entities are important, Neal may need tax information, including returns, from the lower-tiered business entities. The income and deductions from those lower-tier entities are netted in the returns for the holding (upper-tier) companies. Thus, Neal may need to see the returns for lower-tiered entities to determine the sources and nature of Trump’s gross income and deductions as reported on his individual income tax return.
Neal took a big step forward by requesting some of Trump’s tax returns. But he very well may need to take a few more steps.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
J. Scott Applewhite, file/AP Photo