The Trump Administrations Underrated Threat To The IRS

Donald Trump has not been a big believer in tax collection. When Hillary Clinton alleged he did not pay federal income taxes for years, he responded , “That makes me smart.”

Treasury Secretary Mnuchin was less upfront about tax collection in his confirmation hearings. Secretary Mnuchin confirmed his awareness of the consequences of budget cuts to the IRS on revenue collection during his confirmation hearing with the Senate Finance Committee, noting in his prepared remarks , “it is likely that further cuts to the IRS will indeed hamper our ability to collect revenue.”

During the testimony, Mnuchin took his comments for the record one step further, adding , “I can assure you that the president-elect understands the concept of ‘we add people, we make money,’ […] That’s a very quick conversation with Donald Trump.”

Studies of IRS revenue collection agree strongly with the Treasury Secretary on the opportunity to increase collection by funding enforcement initiatives. Indeed, already low-hanging fruit, in the form of additional government revenue collection, is increasingly within reach: in 2016 the collection of $100 of revenue cost only 35 cents, down from 53 cents in 2010, according to the IRS 2016 Data Book . Years of consecutive budget cuts to the IRS have reduced agency staff by 17 percent since 2010.

Despite Secretary Mnuchin’s assurances and the CBO’s 2016 estimated return of between $1.20 and $9.00 per dollar of investment in various IRS enforcement initiatives, the President’s latest budget proposal would cut IRS funding by $239 million. The largest parts of that cut of approximately two percent (likely equivalent to more than 3.5 percent after adjusting for inflation) are directed towards enforcement. Efforts to weaken rather than bolster the IRS present challenges to an already under-resourced agency, and opportunity to those who seek to find “smart’ ways to avoid paying their federal income taxes.

Relative to the drastic funding cuts that IRS officials had feared , or to the cuts proposed for some agencies and programs (for example, a 31.4 percent cut to the Environmental Protection Agency and a 40 percent cut to job training programs), the IRS may seem comparatively unscathed. However, as discussed above, the relationship between funding and expense is different for the IRS. As noted by current IRS Commissioner John Koskinen, “essentially, the government is losing billions to achieve budget savings of a few hundred million dollars.”

If further weakening of IRS funding doesn’t do enough damage to the federal government’s ability to collect revenue, an even more worrisome possibility looms. Commissioner Koskinen was appointed by President Obama. His last day in office is November 9th of this year less than five months from now.

Who will replace Koskinen? And will the replacement be someone who survives a Senate confirmation process in which Trump’s hidden tax returns and purported decades of audits becomes a major topic of discussion? Or instead will we witness the temporary appointment of an IRS director focused on aiding Trump and his allies rather than collecting revenue?

Trump’s selection of corporate lawyer Keith Noreika as acting director of the Office of the Comptroller of the Currency (OCC) has created a dangerous precedent, which could be used to severely hamper attempts at IRS modernization and enforcement. Noreika went directly from being a law firm partner to Acting Comptroller of the Currency. Would Trump appoint a Trump Organization Accountant to become Acting Commissioner of the IRS?

Should the Trump administration place a non-confirmed acting director atop the IRS, an already-stacked deck would further favor the private-sector parties aiming to get around collection. Additionally, such an appointment would create an informational asymmetry, as after up to 130 days as agency head (or more, there’s very little enforcement behind rules around acting appointees), the appointee could return to the private-sector with intimate knowledge of weaknesses in IRS enforcement.

And in particular, that temporary head could make a big headache go away from one very influential person, hedge fund billionaire and Breitbart investor Robert Mercer. In a too-little noticed McClatchy piece last month , it was reported that “The Internal Revenue Service is demanding a whopping $7 billion or more in back taxes from the world’s most profitable hedge fund, whose boss’s wealth and cyber savvy helped Donald Trump pole-vault into the White House.” The IRS demand is hardly controversial, as Mercer’s Renaissance Technologies attempts to use an obviously problematic loophole to pretend that’s its rapid-fire trading constitutes long term investing that is taxed at a far lower rate.

Since polling suggests that wealthy individuals escaping their tax bill are more likely to be considered “unpatriotic” than “smart,” sticking a wrench in the gears of the IRS seems outright treasonous.

So while continuing to monitor Trump-Russia, we need to also seek to limit the damage to the country from Trump’s problematic and seemingly purposeful mismanagement of the IRS that even his own Treasury Secretary knows is wrong.

And while we monitor the IRS’ budget, we also need to be on the watch for a potentially catastrophic revolving door personnel pick to head the IRS after Koskinen’s term expires in November.