Trump Family Tax Story Tests New IRS Chief on Second Day in Office

(Bloomberg) -- Charles Rettig was barely 24 hours into his new job as President Donald Trump’s hand-picked chief tax official when a bombshell news report hit, alleging shady tax dealings by Trump and his family roughly 20 years ago.

With New York state and city officials now saying they’ll examine allegations raised by the New York Times, Rettig -- who built a reputation as a tough tax litigator in private practice -- risks incurring Trump’s wrath if he chooses to follow suit, according to tax lawyers and veterans of the Internal Revenue Service.

Trump Family Tax Story Tests New IRS Chief on Second Day in Office

“Look what happened to Sessions when he wouldn’t block the Russian investigation,” said David Klasing, a Calfornia-based tax litigator and accountant. He was referring to Attorney General Jeff Sessions, who recused himself from overseeing Special Counsel Robert Mueller’s investigation into Russian interference in the 2016 election -- and has been lambasted by Trump on Twitter ever since.

On Tuesday, Trump focused his ire on the Times, calling its article a “hit piece” that was “very old” and “boring.” White House Press Secretary Sarah Huckabee Sanders has said that “many decades ago, the IRS reviewed and signed off on these transactions.”

An IRS spokesman didn’t respond to a request for comment. Tax lawyers say that while the statute of limitations might bar the IRS from pursuing any criminal charges related to the details alleged in the Times story, the agency could levy civil penalties totaling hundreds of millions of dollars -- if it proved that the Trumps pursued strategies they knew to be illegal.

But that’s a big “if.” One problem for investigators would be getting access to records that are about two decades old.

‘Good Luck’

“The IRS has a real problem with record keeping, so good luck with that,” said attorney Beth Shapiro Kaufman of Caplin & Drysdale in Washington. If records aren’t available in agency files, IRS examiners would “have to do some sleuthing,” said Anne O’Brien, also a partner at the firm. Regardless, Kaufman said, it’s probably a longshot for Rettig’s agency to get involved.

“He started the job on Monday, and he’s going to decide on Wednesday that he’s going to audit the president?” she said. “That seems unlikely.”

In truth, Trump’s income tax returns have been under audit for years; he cited the ongoing audit as his reason for breaking with roughly four decades of political tradition when he refused to release any returns during the 2016 campaign. As president, his returns are now routinely audited by federal law.

On the strength of the Times’s tax story, Democrats in Congress are calling anew for the public release of his returns -- and for a full investigation of the steps that Trump and his siblings took regarding the estate and gift taxes they paid on their inherited wealth.

Democrats’ Plans

“It is imperative that the IRS fully investigate these allegations and prosecute any violations to the fullest extent of the law,” said Senator Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee, in a letter to Rettig Wednesday. Senator Orrin Hatch, the Utah Republican who chairs the Finance panel, said Wednesday that he hadn’t read the Times report, but added that Trump “may have to give up those returns, I don’t know.”

“If I was him, I wouldn’t want to give them up,” Hatch said.

After January, Trump may have little choice. Congressional Democrats have said they want to invoke a little-used law that allows chairmen of the House and Senate tax-writing committees to review private tax returns and release them to the full chambers. Republicans, who currently control both panels, have shown no interest in seeing Trump’s returns -- but political analysts believe Democrats could win control of at least the House in November’s midterm elections.

The new allegations will only spur Democrats to put more pressure on Rettig, said Joseph Thorndike, the director of the Tax History Project at Tax Analysts, a trade publication. They “add fuel to the fire, but the fire’s already roaring,” he said.

Potential Penalty

The Times’s report said that Trump’s parents, Fred and Mary Trump, and their estates paid $52.2 million in estate and gift taxes, when they should have paid an amount closer to $550 million. (Fred Trump died in 1999 and Mary Trump in 2000.) The newspaper’s report said the family reported low valuations on much of the rental empire that Fred Trump acquired over the years and passed to his children.

The IRS can set civil penalties as high as 75 percent of any underpayment, plus interest. So before accounting for any interest, the Times’s allegations could mean a penalty of $373.4 million if proven.

Tax lawyers generally agreed on Wednesday that the situation presents a lot of intriguing possibilities. For example, even though the statute of limitations has passed in most instances, it’s possible that Fred Trump didn’t file gift tax returns for some years, said Caplin & Drysdale’s Kaufman. If so, the IRS wouldn’t need to cite fraud in order to open an audit -- despite the long delay -- she said.

Robert McKenzie, a tax partner at Saul Ewing Arnstein & Lehr, said any probe of the gift tax returns could affect the current audits of Trump himself. If the IRS claimed fraud related to understated valuations of property, the agency could pursue what’s known as a “transferee liability” against Trump. If the president didn’t “pick up proper basis for the properties he took from his dad, and if the properties are still around and he still has them, then that could be a problem,” McKenzie said.

Audit in 2000

The Times also reported that the IRS completed an audit in 2000 of the combined estates for Trump’s parents, concluding they were worth $51.8 million, or 23 percent more than Donald Trump and his siblings claimed. (More than three years later, though, Fred Trump’s heirs sold 37 apartment complexes and several shopping centers for more than $700 million, according to the paper’s report. )

If the agency were to now reach a civil finding of fraud, that would be “kind of embarrassing for the IRS,” given that it had already examined the estates years ago, Kaufman said.

No matter what, the agency can be expected to proceed with caution. As IRS commissioner, Rettig holds a five-year term, but serves at the president’s pleasure, said Mario Fazio, the chair of the tax group at Meyers, Roman, Friedberg & Lewis and a former lawyer in the agency’s chief counsel office. Still, he added, firing “is not the norm.”

Of course, nothing about this situation is the norm.

“Everyone is going to cover their a-- on this one,” said Michael Sullivan, a former IRS auditor. “It’s a hot potato.”

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