Trump didn’t want us to know what was in his returns. Was he honest with the IRS? Did hiding information make him a security risk? Is he fit to lead?
Why do we care about President Donald Trump’s tax returns? Is it just because they offer us another episode of reality TV, a window into the lives of the rich and famous?
I would argue there are at least three things we learned from the president’s returns that should concern us as voters, not just as voyeurs. First, we learned that it is possible he has not been honest with the IRS, and may even face potential criminal liability for his dishonesty. Presidents demand sacrifices from citizens and from public servants. Some of us are asked only to pay taxes; others are asked to face death to defend us all. A president who will not even pay his fair share cannot lead.
While that is a troubling possibility, it is not certain that Trump paid any less than he owed. It is difficult to judge the honesty of a tax return without examining the surrounding facts.
Was Trump honest with the IRS?
Still, there are red flags that trained IRS investigators know to look for, and several of those red flags are waving in The New York Times report on the president’s returns. One of them is using a family business’ money to pay for personal or other family expenses. Trump has run into trouble for doing just that before; a New York court dissolved the Trump Foundation in part because Donald Trump converted its assets to his own use.
A family business is not like a foundation, in that its assets belong to the family. It’s totally legal to take money from a business you own. But when you do, you have to report that money as taxable income. In the case of a partnership, such as the Trump Organization, that income might not be taxed until a later year, but it still must be reported at the time it is withdrawn.
A common trick that tax-evading business owners use is to have the business buy things for them directly, and then not report the purchase as income for the owner. In my time as a federal prosecutor, I saw small businesses pay for their owners’ “home office” renovation — actually a lavish kitchen remodel — or for “compensation” for love interests of the owner that were actually just big gifts.
So when we read that the president claimed deductions for hair styling, private jets and big parties at his home, we are seeing behavior typical of expenditures investigators see in tax-evading family businesses. Sometimes these expenses are legitimate. No, you can’t deduct your hair stylist expenses. But for many questionable business expenses, an IRS auditor would have to give the taxpayer a chance to prove that, say, his mansion really is an investment property, not a playground for his adult children.
Consider the consulting expenses the Trump Organization reportedly claimed for payments that lined up with payments reported by an entity controlled by the president’s daughter Ivanka. If these were fair payments for valuable services rendered, they’d raise no tax issues.
But this is also quite similar to the transactions the president’s father, Fred Trump, used several decades ago to avoid taxes, as also reported in The Times. The elder Trump reportedly set up shell companies, owned by his children, and had these place-holder businesses overcharge him for services. In effect, Fred Trump gave gifts to his children, without paying income taxes on the value he took from his business or estate taxes on the money he passed to his heirs.
Was the president inspired by his father to set up businesses, overpay them and then use them to route money tax free to his kids? To know for sure, we’d need to learn more about what Ivanka’s company did, and whether experts think it charged a fair price for those services.
Often this kind of investigation is difficult and expensive, making it challenging for the IRS to discover wrongdoing. Most experts think the IRS is badly understaffed. And small business owners know both these things. By some estimates, the IRS collects less than 50% of the taxes owed by America’s self-employed.
Trump could be a security risk
So whether Donald Trump underpaid or not, a second lesson the president’s returns teach us is how broken our tax system has become. By the admission of the IRS itself, it can no longer afford to audit significant fractions of our wealthiest citizens. When it discovers what it thinks is wrongdoing, it often is outgunned by taxpayers’ lawyers and experts.
If his returns don’t clearly reveal he did anything wrong, why is President Trump so aggrieved about the revelation? He has reneged repeatedly on promises to reveal his tax returns, fought tooth and nail in court to protect them, even secured the appointment of a business associate of his tax lawyers to be chief counsel of the IRS. We can’t be sure what he finds so embarrassing, or so damaging. Maybe it’s the simple fact that he owes about $400 million to persons or powers unknown.
Trump and the election: Ignore the strongman fantasies. If Trump loses the election, he’ll lose his job. Period.
But that brings us to our last lesson. When public officials engage in very aggressive tax planning, right or wrong, that planning itself can be a security risk. For whatever reason, the president did not want us to know what was in his returns. And that means those who held bits of that information — his creditors, the folks who worked with Ivanka’s maybe-consulting company, even his hairdresser — had potentially valuable information. Do we know what they wanted in exchange for keeping it to themselves?
That’s the kind of compromising situation that usually prevents federal job applicants from obtaining security clearance. As voters, we all have to pass judgment on whether this president should have clearance to govern for another four years.
Brian Galle, a law professor at Georgetown University specializing in economics and tax law, spent three years as an attorney in the Criminal Appeals and Tax Enforcement Policy Section of the U.S. Justice Department’s Tax Division. Follow him on Twitter: @BDGesq
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