The IRS Tried to Take on the Ultrawealthy. It Didn’t Go Well.

The IRS Tried to Take on the Ultrawealthy. It Didn’t Go Well.
Ten years ago, the tax agency formed a special team to unravel the complex tax-lowering strategies of the nation’s wealthiest people. But with big money — and Congress — arrayed against the team, it never had a chance.
By Jesse Eisinger and Paul Kiel
Apr 5 2019
https://www.propublica.org/article/ultrawealthy-taxes-irs-internal-revenue-service-global-high-wealth-audits

On June 30, 2016, an auto-parts magnate received the kind of news anyone would dread: The Internal Revenue Service had determined he had engaged in abusive tax maneuvers. He stood accused of masking about $5 billion in income. The IRS wanted over $1.2 billion in back taxes and penalties.

The magnate, Georg Schaeffler, was the billionaire scion of a family-owned German manufacturer and was quietly working as a corporate lawyer in Dallas. Schaeffler had extra reason to fear the IRS, it seemed. He wasn’t in the sights of just any division of the agency but the equivalent of its SEAL Team 6.

In 2009, the IRS had formed a crack team of specialists to unravel the tax dodges of the ultrawealthy. In an age of widening inequality, with a concentration of wealth not seen since the Gilded Age, the rich were evading taxes through ever more sophisticated maneuvers. The IRS commissioner aimed to stanch the country’s losses with what he proclaimed would be “a game-changing strategy.” In short order, Charles Rettig, then a high-powered tax lawyer and today President Donald Trump’s IRS commissioner, warned that the squad was conducting “the audits from hell.” If Trump were being audited, Rettig wrote during the presidential campaign, this is the elite team that would do it.

The wealth team embarked on a contentious audit of Schaeffler in 2012, eventually determining that he owed about $1.2 billion in unpaid taxes and penalties. But after seven years of grinding bureaucratic combat, the IRS abandoned its campaign. The agency informed Schaeffler’s lawyers it was willing to accept just tens of millions, according to a person familiar with the audit.

How did a case that consumed so many years of effort, with a team of its finest experts working on a signature mission, produce such a piddling result for the IRS? The Schaeffler case offers a rare window into just how challenging it is to take on the ultrawealthy. For starters, they can devote seemingly limitless resources to hiring the best legal and accounting talent. Such taxpayers tend not to steamroll tax laws; they employ complex, highly refined strategies that seek to stretch the tax code to their advantage. It can take years for IRS investigators just to understand a transaction and deem it to be a violation.

Once that happens, the IRS team has to contend with battalions of high-priced lawyers and accountants that often outnumber and outgun even the agency’s elite SWAT team. “We are nowhere near a circumstance where the IRS could launch the types of audits we need to tackle sophisticated taxpayers in a complicated world,” said Steven Rosenthal, who used to represent wealthy taxpayers and is now a senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.

Because the audits are private — IRS officials can go to prison if they divulge taxpayer information — details of the often epic paper battles between the rich and the tax collectors are sparse, with little in the public record. Attorneys are also loath to talk about their clients’ taxes, and most wealthy people strive to keep their financial affairs under wraps. Such disputes almost always settle out of court.

But ProPublica was able to reconstruct the key points in the Schaeffler case. The billionaire’s lawyers and accountants first crafted a transaction of unusual complexity, one so novel that they acknowledged, even as they planned it, that it was likely to be challenged by the IRS. Then Schaeffler deployed teams of professionals to battle the IRS on multiple fronts. They denied that he owed any money, arguing the agency fundamentally misunderstood the tax issues. Schaeffler’s representatives complained to top officials at the agency; they challenged document requests in court. At various times, IRS auditors felt Schaeffler’s side was purposely stalling. But in the end, Schaeffler’s team emerged almost completely victorious.

His experience was telling. The IRS’ new approach to taking on the superwealthy has been stymied. The wealthy’s lobbyists immediately pushed to defang the new team. And soon after the group was formed, Republicans in Congress began slashing the agency’s budget. As a result, the team didn’t receive the resources it was promised. Thousands of IRS employees left from every corner of the agency, especially ones with expertise in complex audits, the kinds of specialists the agency hoped would staff the new elite unit. The agency had planned to assign 242 examiners to the group by 2012, according to a report by the IRS’ inspector general. But by 2014, it had only 96 auditors. By last year, the number had fallen to 58.

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