Donald Trump and Taxes: Fast and Loose with Loopholes or Fraud?

“Can that be legal?” was the question heard ‘round the world as readers waded through the New York Times report on Donald Trump’s tax avoidance.

The president’s apparent abuse of everything from hair-care deductions to consulting fees for family members raises questions about whether Trump is fast and loose with tax loopholes or whether the IRS simply isn’t enforcing the law. Either way, Trump successfully flouting or pushing the limits of the law shouldn’t come as a surprise: Congress has cut IRS funding in each of the last 10 years. While the New York Times’ findings certainly support the case for loophole-closing tax reforms, the most immediate policy response should be giving the IRS the budgetary tools it needs to stop high-end tax avoidance in its tracks.

Some of the president’s tax strategies are (relatively) small in scope: Trump allegedly deducted $70,000 of hair care expenses as a cost of doing business. The law states clearly that personal expenses should not be deductible as a cost of doing business, and it’s hard to think of a more personal expense than a haircut (well not that hard, but it’s an unpalatable train of thought). This makes it a little bewildering that a New York Times investigation should be able to unearth what must have been a long-term series of clear violations, but the IRS wouldn’t notice.

And as they say, where there’s smoke there’s fire. Trump’s willingness to claim dubious deductions for hair care likely is paralleled in other areas of the tax return. That’s certainly the conclusion to be drawn from the $740,000 consulting fee he appears to have paid to his daughter Ivanka, apparently for work done on a project that was already part of her responsibilities as a full-time employee of the Trump organization. As obviously fishy as this arrangement seems, it’s only a small fraction of the $26 million of similarly mysterious “consulting fees” the Times identified Trump used to reduce his taxable income. And we know about it only because the Times was able to compare Trump’s tax return to Ivanka’s financial disclosures for 2017. These (and other) disclosures would also be within the reach of a properly funded IRS, of course. Right now, the IRS appears to be helpless to stop these shenanigans—and wealthy Americans appear to be very aware of this.

Then there’s the biggest, and most disturbing, tax break unearthed by the Times: the $700 million deduction that appears to have generated the president’s much-ballyhooed tax audit. In 2009, as Trump’s third bankruptcy loomed, he renounced his stake in his failing New Jersey casinos and appears to have reported a $700 million loss on his taxes as a result. In this situation, if you abandon your failing business like an old car by the side of the road, you can write off all your losses from that business. That’s the $700 million. But if you (metaphorically) pull the transmission out before abandoning the car, retaining at least some of the value of the old business, then the amount you get to write off is limited to $3,000. So it really matters, for tax purposes, if you get anything at all in exchange for walking away from a failed business.

And, in the Times’ words, “Mr. Trump does appear to have received something. When the casino bankruptcy concluded, he got 5 percent of the stock in the new company.”

In this instance, the obvious question to ask isn’t how the IRS missed this—they clearly didn’t—but how an audit of a 2009 tax return isn’t yet complete.

But this question has, more broadly, been asked and answered as the result of a ProPublica investigation in 2019, which determined that the IRS is now auditing low-income Americans at the same rate that they are auditing the wealthiest, with the absurd consequence that the most heavily-audited county in the nation was Humphreys County, Miss. When Congress demanded an explanation from the IRS, the agency’s response was that their chronic underfunding meant they could only afford to audit poor people.

Restoring IRS funding to its Obama-administration levels should be a no-brainer: additional resources could replace the 25 percent of senior-level auditors lost to attrition over this period. Such expertise is necessary to investigate the sophisticated tax strategies employed by the Donald Trumps of the world. If we’re all wondering how on earth the President of the United States would be so brazen as to claim transparently inadmissible deductions from his 1600 Pennsylvania Avenue address, the blame can be laid squarely at the feet of the architects of the last 10 federal budgets. An adequately funded IRS is the vital next step in getting to a place where wealthy Americans don’t view paying income taxes as discretionary.

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