Trump Audit Shows Depths of I.R.S. Funding Woes

WASHINGTON — Before Donald J. Trump became president and after, his exceedingly complex and voluminous tax returns came under regular scrutiny by the Internal Revenue Service. The number of agents assigned to the audit team: one.

After he left office, the I.R.S. said it was beefing up the audit team, to three. The tax agency itself acknowledged that it was still overwhelmed by the complexity of Mr. Trump’s finances and the resistance mounted by the former president and his sophisticated army of accountants and lawyers, which included a former I.R.S. chief counsel and raised questions early last year about why even three revenue agents should be assigned to audit him.

“With over 400 flow-thru returns reported on the Form 1040, it is not possible to obtain the resources available to examine all potential issues,” I.R.S. agents said of Mr. Trump’s tax returns in an internal memo that was released by the House Ways and Means Committee this week as part of its oversight of the mandatory presidential audit process.

The I.R.S. is a sprawling agency, and an audit notice can strike fear in most taxpayers. But the committee reports released this week highlight how depleted the I.R.S. has become in the last decade, as Republicans starved it of funding. They also show how the agency has become increasingly unable to crack down on wealthy taxpayers who push the legal limits to lower their tax bills and have the means to fend off audits if they get caught.

That has led to a $7 trillion “tax gap” of revenue over a decade that is owed but goes uncollected, in many cases from superrich taxpayers such as Mr. Trump, who has boasted that he fights to pay as little tax as possible. But the resource shortfall is playing out against the backdrop of a partisan and ideological battle over the I.R.S. that appears sure to continue to constrain its ability to match the capacity of an industry dedicated to tax minimization and avoidance.

The agency’s work force of about 80,000 is the same size as it was in 1970. Its enforcement staff has fallen by over 30 percent since 2010, and audits of millionaires have declined by more than 70 percent. Its budget has declined by nearly 20 percent, when accounting for inflation, during the last decade.

Republicans have for years accused the I.R.S. of political bias and unfairly targeting conservatives. For that reason, they have fought to cut the agency’s funding or, in some cases, called to abolish it altogether.

The spending package that Congress is voting on this week reduces the base funding levels for the I.R.S. by $275 million to $12.32 billion, which Republicans hailed as a victory.

However, that does not account for the $80 billion in supplemental funding that the I.R.S. was granted through the Inflation Reduction Act this year to buttress its resources over the next decade and hire more than 80,000 agents and staff members. The Biden administration has broad discretion over how and when to deploy that money to modernize the agency and bolster its enforcement capacity.

The Treasury Department, which oversees the I.R.S., is planning to use some of those funds to hire more auditors who can tackle complicated tax returns.

Charles P. Rettig, who was appointed as I.R.S. commissioner by Mr. Trump and left the post last month, has denied any involvement in the audits of the former president. But he suggested in an email to The New York Times that the additional funding the agency is receiving will help it undertake such complex examinations.

“I.R.S. desperately needs additional specialized examiners and related support to conduct additional meaningful examinations of complex individual returns involving partnerships and tiered arrangements of partnerships and similar pass-through entities, foreign transactions, complex financial arrangements and similar,” Mr. Rettig said. He added that “many decisions within the I.R.S. have long been resource driven.”

The funds for the I.R.S. are expected to become one of the first big fights in Congress next year when Republicans take control of the House, as Representative Kevin McCarthy, the California Republican who is seeking to become speaker, signaled in September.

“On that very first day that we’re sworn in, you’ll see that it all changes,” Mr. McCarthy said. “Because on our very first bill, we’re going to repeal 87,000 I.R.S. agents. Our job is to work for you, not go after you.”

In November, Senator Ted Cruz, Republican of Texas, made clear that Republicans believe that a bulked-up I.R.S. is a political liability for Democrats.

“I think we ought to fight an epic, knock-down, drag-out fight over stopping the Democrats from funding 87,000 new I.R.S. agents to harass and intimidate and persecute Americans and their political enemies.”

Democrats are also doubling down on the findings. Representative Richard E. Neal, the chairman of the Ways and Means Committee, has introduced legislation that would require the I.R.S. to publish presidential tax returns, audit them “in a timely manner” and update the public on the results. The House passed the legislation on Thursday, though it appears to have little prospect of passage by the Senate.

The Biden administration has emphasized its ambitions of modernizing the antiquated technology at the I.R.S. and improving its customer service. In an August memo laying out how the money would be deployed, Treasury Secretary Janet L. Yellen said the agency would be focused on cracking down on rich tax dodgers and big companies that have long evaded paying what they owe to the federal government.

She also promised that middle-class households would not face more onerous scrutiny and that their audit rates would not rise.

“These investments will not result in households earning $400,000 per year or less or small businesses seeing an increase in the chances that they are audited relative to historical levels,” Ms. Yellen wrote. “Instead, they will allow the I.R.S. to work to end the two-tiered tax system, where most Americans pay what they owe, but those at the top of the distribution often do not.”

The revelations about Mr. Trump’s audits laid bare the difficulty that the I.R.S. has had in auditing the rich. The former president proved to be particularly uncooperative, as his team failed to provide facts needed to resolve certain issues and threatened to protest or appeal the process.

The process of auditing Mr. Trump apparently even grew contentious. An internal I.R.S. memo detailed by the committee said, “There has been some animosity between our counsel and taxpayer’s counsel.”

The report suggested that as the I.R.S. tried to work its way through Mr. Trump’s maze of tax returns, revenue agents appeared to take for granted that the assertions made by Mr. Trump’s accounting firm were true.

Michael J. Graetz, the deputy assistant secretary for tax policy at the Treasury Department from 1990 to 1991, said the acquiescence of the I.R.S. to big accounting firms was striking.

“Any return with that degree of complexity and those dollars at stake is going to be prepared by professionals, and so if that was the Good Housekeeping seal of approval, then there would be very little need to be auditing those kinds of returns,” Mr. Graetz said.

But it was clear from the committee report that for the most part, the I.R.S. was just outgunned.

An agency memo that was recounted in the report described an audit team manager laying out the daunting nature of Mr. Trump’s returns.

“This return has about 400 flow-through returns reported on Schedule E and, since some of these are tiered, report a total of about 500 flow-through returns,” the auditor said.

Underscoring the need for more resources, the memo went on to say that to “do a thorough review of these returns, we would need a team much larger than the current team.”