There’s new heat on Donald Trump over a rather dry topic: his tax returns. Mitt Romney, who has been making the TV news rounds, claimed this week that he expects a “bombshell” in Trump’s tax returns, if only the candidate would release them.
Trump, in turn, raised eyebrows at the Republican presidential debate on Thursday when he said that he can’t release his tax returns yet because he is in the midst of an audit. He also added this claim, a different sort of bombshell: “I’ve been audited every year. Twelve years or something like that.”
Is that plausible? And, if Trump isn’t exaggerating: Why would he get audited 12 years in a row? A tax expert dissects the claim.
Possible, but a stretch
The odds of getting audited 12 years in a row are slim, but not impossible, experts say.
Less than 1% of Americans get audited every year, and that number shrinks each year as the IRS workforce and budget has slimmed down. But among “high net-worth individuals,” the rate is higher: Nearly 7% get audited. And Trump is certainly a high net-worth individual.
“As your income increases, your chances of being audited go up significantly,” says John Petosa, a CPA and professor at Syracuse University’s Whitman School of Management. “If you think about it, it makes sense—is the IRS going to spend time and money and resources auditing somebody who makes $30,000 a year? Or are they going to spend their time auditing someone who makes billions of dollars? There is probably more tax revenue to collect from a guy like Donald Trump, especially if he’s being aggressive in his deductions.” (As the campaign cycle has proven, there are few areas in which Trump is not aggressive.)
The IRS actually has a rule, in its agent manual, that if a person is audited and receives an assessment of zero (that is, does not owe additional money), the IRS cannot audit them again for two years. That means if Trump is telling the truth, then the IRS has repeatedly found discrepancies in his returns.
Until recently, it was typical for big corporations to get audited every year. This was called the Coordinated Examination Program. Many big public corporations even had rooms specifically designated for use by visiting IRS agents. But as the IRS’s budget has been slashed, it has shrunk the program.
It’s worth noting that for wealthy individuals, the stigma once associated with an audit has faded. As Steven Burke, a partner at McLane Middleton and a tax professor at the University of New Hampshire Law School, explains, “Many wealthy people welcome an audit, because once an audit occurs, your return is done, you don’t have to worry about it. If you take an aggressive position in something, for example, once the IRS has audited it, it is highly unlikely they will ever come back and give you trouble about it again.” For regular, non-mogul folks, too, an audit is less unpleasant these days. “It used to be an agent would come to your house and it was an embarrassing thing. Many audits now are done just electronically by correspondence; you get an email, you send back a check,” Burke says. “That said, the IRS does still do some in-person audits, and it is still a scary, nerve-wracking experience for the average person.”
Although Trump is more prone to tax audits because of his wealth, experts say it’s the geographical breadth of his business interests, more than his wealth, that makes him a target. When Trump says he has been audited, he is likely referring to both himself, as an individual, and to his companies, or companies in which he has a stake. Audits can occur on an individual basis or a corporate basis, and some companies Trump has a hand in may be considered “passthrough entities,” which do not pay federal taxes, just report it to the IRS, and the individual owners or investors have to report and pay it.
“With all of his real estate abroad, he must have foreign income coming in, and that’s what I imagine they’re checking,” says Vincent Cervone, who runs VRC Associates, a tax shop in Brooklyn, N.Y. “His regular income is kind of straightforward, but the foreign income is what they would be investigating. Right now the IRS has a pet peeve with foreign accounts because a lot of people are taking their money overseas to get certain benefits.”