June 8, 2016
What You Need to Know About Trump’s Tax Return Disclosure Controversy
Bernie Kent, Chairman & Advisor for Schechter Investments and Forbes.com contributor, takes a closer look at the controversy regarding Donald Trump’s tax return in a two-part series written for Forbes. He discusses how a complex return like Trump’s can mean continuous audits by the IRS and that this may mean that Trump never releases his records to the public. Part two discusses what a tax return can reveal about Trump’s income and tax rate; charitable intentions and sources of income.
Part One: Examining the Tax Issues, Audit, and Timing
Presumptive Republican presidential nominee Donald Trump has said he will release his tax returns once an ongoing IRS examination is completed. Many commentators and citizens are questioning his decision to wait. In this part I discuss the tax issues surrounding disclosure, audits and timing. In the next installment, I will discuss the usefulness of tax return disclosure by candidates.
Donald Trump has said that the reason that he has not released his tax returns is that his returns are being audited. The fact that his tax returns are under audit in no way prevents him from disclosing them. He has not stated which years’ tax returns are under audit. Normally tax returns are selected for audit between one and two years after they are filed. Trump tweeted a photo of him signing his 2014 form 1040 on October 15, 2015. This means that the 2014 tax return would not normally have been selected for audit until at least October of this year. However, when a taxpayer is under examination for a prior year, the auditor may request to see the current year form 1040 and add that to the list of returns being examined.
Tax practitioners disagree whether there is a risk of additional tax being imposed on Mr. Trump due to public disclosure of the information contained in his tax returns under audit. Some experts say that this would expose his tax return to greater scrutiny by allowing every tax professional in the country to suggest ways that Trump’s returns could be attacked. Others say the IRS already knows what they want to audit and are unlikely to be swayed by suggestions from the public. One may argue that if you want to run for president, you should not be concerned with how the disclosure of your tax return might affect your tax audit. That is the price you must pay to be transparent to the voting public. President Nixon disclosed his tax returns while under IRS audit. There was no suggestion that his disclosure had an impact on the audit.
There is no standard formula for what information should be disclosed from the candidate’s tax return. Some candidates have released their entire return, while some have released only the first two pages. Trump’s return probably runs more than 1,000 pages. If he released the first two pages along with Schedule A and a list of his charitable contributions, much of the valuable information would be disclosed. It is hard for me to envision how this limited disclosure would create much possibility even for tax experts to provide anything of value to the IRS even if the IRS were interested in getting help in their audit.
In his recent CBS This Morning interview, Trump Campaign Manager Corey Lewandowski suggested another possible reason not to release the tax returns, “The notion that you’re going to release information that is currently under audit that could change or not change, based on the IRS findings, doesn’t make any sense.” One obvious approach would be to release the return now as filed and release any audit adjustments if they occur, though I doubt that this is necessary. Every taxpayer’s tax return may be adjusted at some point in the future if it is audited. Even if there were changes, it is unlikely to have a material impact on the information available to the public on the returns that were released. Donald Trump’s tax attorneys stated that the audits for tax returns for 2002 to 2008 were closed without an assessment of a deficiency, on a net basis. This would suggest that the current audit is not likely to make major adjustments. Why not release the tax returns from 2002 to 2008 that have already been closed by the IRS? Since these returns are no longer under audit, one might think that Trump would have no objection to releasing them. But Lewandowski dismissed this by saying there is nothing to see from those years.
Trump’s tax attorneys also said that Trump’s tax returns have been under continuous audit since 2002, consistent with the IRS’s practice for large and complex businesses. Conceivably there may not be a time when Trump’s returns are not under audit. Further, even if they are already auditing 2014, there is no reason to think that this will wrap up before the election. For example, the 2015 return could be added to the audit and 2014 kept open. The audit could be completed, but the audit findings could be appealed within the IRS, which could add another year before the results are finalized. Corey Lewandowski said Trump “is going to pay the smallest amount of taxes possible… He fights for every single dollar.” One might expect that if the audit results in any additional tax assessment, an appeal of the assessment is likely.
If Donald Trump continues to insist that he will not release his tax return until the audit is completed, I strongly believe that he will not disclose his tax returns prior to the election.