Releasing Tax Returns Under Audit: Is Trump Right or Wrong?

Posted on Tue, Mar 01, 2016 ©2020 Drucker & Scaccetti


Last week, at the Republican presidential debate in Houston, GOP frontrunner Donald Trump claimed he could not release his tax returns. "I will absolutely give my return, but I'm being audited now for two or three years, so I can't do it until the audit is finished, obviously,” he said. But how much of this is true? Here’s what The Tax Warriors® have to say…

 

The short answer is there is no law on the books that bars Mr. Trump from releasing his tax returns because they are under audit.  However, it might not be the wisest decision to release them. Here’s why.

It is important to first note that Section 6103 of the Internal Revenue Code states that tax returns are confidential and are protected as such.  The only person who can release this information is the taxpayer (Mr. Trump, in this case).  It should also be noted that there is no law that requires presidential candidates to release their tax returns to the public.

 

So why would “The Donald” not want to release his tax returns?  First, releasing tax returns during audit could have adverse effects for you and your businesses.  It could cause anyone who has a grievance with you to use the information in the returns to their advantage, or to discredit your information with the IRS.  We should note that given Mr. Trump’s wealth, we assume the audit he claims is underway is part of the IRS Global High Net Worth Industry Group, which can be a very comprehensive examination and cover several years.

 

Second, it could allow competitors to scrutinize your business structure and strategies.  Mr. Trump’s individual tax returns are not your run-of-the-mill 1040 tax returns, with wages, some investment income and typical deductions like mortgage interest and charitable contributions.  His returns likely include multiple flow-through entities and investments from around the world—a complex return that most would not understand.  One of our Tax Warriors has been known to say, tax returns speak to us and tell a story.  Well, sometimes you don’t want your competitors to know that story. 

 

Last, instead of having just an IRS agent, or team of agents if it is a Global High Net Worth audit, review released returns they would be reviewed by thousands of tax experts and Mr. Trump’s challengers who already question some of his business dealings.  Review of these returns without proper context of the background on positions taken, can lead to unwanted, and perhaps unwarranted, scrutiny and controversy.  With the exception of William Randolph Hearst (AKA Citizen Kane) in 1904, no one of Mr. Trump’s wealth has ever been so close to capturing a major party’s nomination. His returns may divulge wealth-building strategies he wishes to remain secret.  But we guess, that’s the point, right?

 

So in conclusion, it would be the advice of any sound tax advisor to not release returns under audit.  While that is the professional conclusion, the political world sees it differently.  Many presidents and candidates have released their returns to the public, read more from our previous blog on the subject. 

 

Of course, Mr. Trump’s challengers Marco Rubio and Ted Cruz, who each recently released the first two pages of several years’ tax returns, could make the case that when you sign and submit your return you are swearing under penalties of perjury that the return is accurate, thus an audit should not matter.

 

Audits and tax controversies of high-net-worth families and individuals happen all the time.  But when you are the frontrunner of your political party for its nomination to be President of the United States, and are already one of the most well-known business people in the world, the court of public appeal is all that matters.  It’s not what’s in the tax returns that matter; it’s how it is spun for the 6 and 11 o’clock sound byte that matter. Mr. Trump knows this, so his decision to hold back his returns while they are under audit, while questionable by many, seems sound.  Of course we are wondering how he will deal with disclosing audit examination changes if and when he does decide to release his returns.

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