As of the date of this article, no one knows anything on the future of tax enforcement; likely, not even the President himself. Actually, there is one relative certainty: the IRS will stop examining the President’s individual tax returns. Attempting to forecast other enforcement (or lack thereof) is likely an exercise in futility.
Many others in my profession, as well as those in the media, feel it appropriate to spout tax enforcement prophecy as if it were the Gospel; this creates, of all things, even more “fake news.” With the aforementioned in mind, it would be prudent to take my expectations of future tax enforcement outlined herein for what they are: either opinions, or just some “alternative facts.”
An Abridged Version of Tax Enforcement under the Obama Administration
In 2009, the Offshore Voluntary Disclosure Initiative (OVDI) was launched. This made international tax enforcement a priority for the IRS and the Department of Justice (DOJ). The OVDI has had a few iterations and continues today as the Offshore Voluntary Disclosure Program (OVDP). Other primary international enforcement mechanisms include the Foreign Account Compliance Act (FATCA), which was made law in 2010 and enforced in 2014, and the DOJ’s Swiss Bank Program. Domestically, enforcement focused on tax-related identity theft and, more recently, employment tax compliance and fraud.
A Disclaimer to My Fellow Respected Tax Practitioners
I am sure that I have omitted some facet of tax enforcement under Obama that you find to be imperative. As you read on, I am sure you will likely disagree and/or conclude that I am missing some essential fact that I should have considered. I understand these perceived transgressions will irk you. Please do not email me.
The Positive Effects of Offshore Tax Enforcement Programs
The offshore tax enforcement programs both enlightened and shrunk the tax world. Offshore banks, taxpayers and foreign governments are all on notice. Many were caught and prosecuted or simply scared straight. The deterrent effect of these programs is uncertain at best. Additional tax havens or avoidance arrangements continue to be discovered, such as the Panama Papers and more recently “The Canada Papers” (more amusingly known as “Snow-Washing”). In reality, until we exterminate the super-wealthy who hate paying taxes, lawyers and bankers, these tax avoidance arrangements will regenerate. The Offshore Program (OVDI/OVDP) also had its own tribulations – principally that a majority of taxpayers entering these programs were not tax evaders or fraudsters; They were taxpayers with foreign bank accounts who were simply unaware of the reporting requirements or falsely believed their offshore income was not subject to tax by the United States. Thus, the enforcement net cast with OVDI/OVDP was way too wide; taxpayers caught in the net paid a considerable price with penalties, stress, and attorney’s fees.
Tax enforcement under Obama was unexceptional; however, what was not as apparent at the time was the fact that the IRS was facing a strong headwind, with its funding being cut by 17% since 2010. This meant 13,000 fewer IRS employees and a cut to IRS enforcement staff by 23%, which resulted in historically low individual and business tax audits. During these cuts, there was the implementation of the Affordable Care Act, FATCA, identity theft prevention efforts and, of course, efforts to deny Tea Party groups tax-exempt status. Haters of the IRS like Ted Cruz, John Boehner, and the newly elected Tea Party members of Congress all deemed these IRS Budget cuts as a triumph. This leaves me befuddled. Either these uncompromising right-wingers wanted to just obstruct Obama on policy that affects all Americans or they were too obtuse to understand that IRS cuts will decrease tax collections and revenue. (All this while simultaneously publicly grumbling about national debt any time Fox News will let them on.)
Trigger Warning: The Following Statement May be Hurtful to the Delicate Snowflakes. It is Advised to Proceed to a Safe-Space.
The President of the United States of America is now Donald J. Trump. The Attorney General is Jefferson B. Sessions III. The Secretary of the Treasury is Steven T. Mnuchin.
Let’s start with the President. He has admitted to not paying income tax in the past with claims such as, “I’m smart for not paying taxes.” He has refused to release his tax returns, citing that he was under IRS exam and following the advice of his tax counsel. As a businessman, it is evident that he is not a fan of the IRS and tax enforcement.
During the campaign, and so far in his brief Presidency, he has communicated his intention to implement the following changes to tax policies: lower rates, tax cuts, simpler forms, closing corporate loopholes, and having companies bring funds back from overseas. Enforcement has not been a focus other than not enforcing the health care mandate.
Fact: President Trump is Adept at Developing Real Property
He was born into the business and it has been his life’s work. He has purchased or developed skyscrapers, hotels, casinos and golf courses. These business projects have generally been a success, as opposed to Trump Steaks or Trump University. Even President Trump’s biggest detractors need to understand that he can build things. He built Trump Tower in the middle of Manhattan. That is quite an accomplishment. I personally know some very bright professionals who cannot successfully navigate the regulatory process set up by their HOA to paint the front door of their own home a slightly different color. Again, Trump built a tower in Manhattan, which required obtaining financing, finessing city and state governments, environmental issues, the NYC Mob, and unions… and all before the construction even began. Take a moment to think about the process you went through renovating your kitchen or having a pool installed in your backyard. Now multiply that by a billion and that is measure of what Trump accomplished.
If you administered a polygraph to Trump and asked him what are the three best aspects of Trump Tower, his answer would be: big, shiny, and named after himself. It is not debatable that his ego is “yuuuuge”. He will unquestionably want to leave a tangible and visible legacy as President, and he will do this by a massive infrastructure development throughout the United States (likely more so in traditionally red states). The projects will be big and shiny. He will be there for a photoshoot when construction starts on a bridge or airport or railway or a big beautiful wall with a door. All of this infrastructure will employ workers and is something the Democrats will have political trouble opposing. The primary issue is how all this will be funded. Trump promised tax cuts and economic growth may occur, but this is not enough cover the spending (and the debt levels are already obscene).
Fact: Attorney General Jeff Sessions is from Alabama (Roll Tide)
AG Sessions would like to roll illegal immigrants right out of the country, as he is a staunch opponent of amnesty; he is a climate change skeptic; he is inherently religious, has been accused of racism, and is a budget hawk. AG Sessions is basically a cartoon depiction of a Republican from the South. Sessions will be a busy man defending Trump’s digressions and will be too busy carrying out his own agenda to get involved with tax enforcement policy. That said, I expect an attorney with a mindset similar to Sessions to be appointed to head the Department of Justice’s Tax Division.
Fact: Spellcheck does not have a suggestion for Steven Mnuchin’s Last Name
The person now in charge of the U.S. Treasury is Steven T. Mnuchin. Steven is very accomplished: he graduated from Yale, spent many years at Goldman Sachs, ran a hedge fund, led a group in buying a failed lender, and later founded a motion picture company as a side business.
There appears to be a pattern in one specific characteristic for Trump appointees: incredible wealth. Goldman Sachs is in the upper echelon of investment banking; they may even have super powers as they make gobs of money out of nothing, and when they lose gobs of money, they get the government to bail them out. A simple indicator of the direction Mnuchin would take was revealed during his confirmation hearing, where he mentioned that the IRS was understaffed and was concerned about outdated technology.
My Predictions: The Future of Tax Enforcement Under the Trump Administration
President Trump, Mnuchin, and whoever is appointed to lead the Tax Division of the DOJ will be the primary drivers of future tax enforcement. Trump is far from being a traditional Republican. He is an egotistical businessman. Again, his driver will be building tangible infrastructure. To do this, he will run into an array of obstacles. His persistence will be an asset, similar to building a skyscraper in Manhattan. He will find practical solutions.
One of President Trump’s obstacles will be funds. He will add to the debt like every other President and he will look for ways to achieve higher revenues. Increasing tax enforcement will be will be one way to increase revenues without implementing new taxes.
Mnuchin and his Goldman Sachs minions he brings with him will use technology and their business intelligence to identify flaws and make improvements to the IRS. As declared in his confirmation hearings, he believes the IRS is understaffed. President Trump will listen to Mnuchin on how increasing hiring of IRS employees, particularly enforcement staff, will produce greater revenue. President Trump will pause and day-dream of some bridge being built, possibly even with his name in it, and then President Trump will force an increase of the IRS’ budget. The usual suspects like Ted Cruz will oppose this. President Trump will revert to Primary Candidate Trump and personally attack Cruz. With others, he will cut deals, and this will all be part of his end game to build a tangible legacy of infrastructure around the country.
Through IRS data and sophisticated Goldman Sachs / hedge fund like computer modeling, Mnuchin will figure out where the money is and how it can be collected. While Mnuchin will have the data, I think the data will tell them the obvious: hire an army of Revenue Agents and target successful small business owners. Targeting taxpayers with offshore accounts or investigating foreign banks that hide money sounds awesome, but the issue with this is volume: there are relatively few super-wealthy tax evaders and a limited number of banks. When the wealthy tax evaders and banks are caught, they retain expensive and effective tax counsel. Then, the government is in a drawn out legal fight, further draining governmental resources.
Large corporations have been a target of the IRS for a long time. Many are under perpetual IRS examination. This practice should logically diminish under the leadership of Mnuchin. These corporations are already heavily regulated by other governmental agencies and have the resources to employ teams of accountants, in-house attorneys, and regulatory professionals. Additionally, these corporations almost exclusively use Big 4 accounting firms and have large law firms as outside counsel. With these resources, processes, and, again, other regulations in place, finding material tax loss or gap is very unlikely. Lastly, time to face reality: IRS Revenue Agents do not have the knowledge and/or experience to understand the complex structures that these large corporations use.
Once the efforts of the last few years are in place, the Identity Theft issues should begin to subside. While the Earned Income Credit fraud is real, it is immaterial. The IRS should not be chasing after relative chump change.
What Remains: Small Businesses
This is where the Mnuchin will focus. The population of small businesses are endless. Accounting and tax compliance is often viewed as an annoyance and resources are allocated as such. Furthermore, the business structure of small businesses are generally basic, so auditing them is simpler.
Right now, on the collection side of the IRS, taxpayers owing $250k or less are generally left alone or remain in a queue to be assigned to a Revenue Officer. The IRS has a major shortage of Revenue Officers. The current collection efforts of the IRS are done remotely by the Automated Collection System. Being remote makes evading tax payments much easier for tax debtors. Now, a Revenue Officer is on the ground collecting locally. It is common knowledge that Revenue Officers generate collections far in excess of their costs. Hiring a second army of Revenue Officers is a no brainer. Even a sophisticated man like Mnuchin will take the path of least resistance to easy tax collections and make these hires.
Trump is not a conventional President. If there is ever a chance for a federal tax amnesty program, it will be under President Trump. Many states have had tax amnesty programs where penalties and interest are abated or reduced for tax debtors when they come into compliance. These have been effective, and could be a source for additional income.
“Making Tax Enforcement Great Again” will be aimed at reducing, but not eliminating, enforcement on the super-wealthy, their tax havens, foreign banks, large corporations and wherever else Mnuchin’s minions determine there is a low return on investment. The new focus will be small businesses and, again, wherever there is a high return on investment. Armies of IRS enforcement personnel will be hired and sent into battle. Cash money will flow into the Treasury. Trump will use that money – and loads of new debt – to build big and shiny things.