Raw Story uncovers a huge secret tax favor for the super wealthy

Raw Story has uncovered a secret IRS tax favor for the super-rich—authorized when Donald Trump was president—that will take effect on Thursday, July 1. President Biden can stop it with one phone call. Will he?

The Biden White House was unaware of this Trump tax favor—disguised as a crackdown on wealthy tax cheaters—when Raw Story asked about it on Friday.

That's not surprising because the IRS remains under the control of Charles Rettig, a holdover from the Trump era. Before Trump named him IRS commissioner, Rettig was a Beverly Hills tax lawyer who helped the super-wealthy escape taxes and—if they got caught cheating—negotiated secret settlements that avoided public humiliation while minimizing taxes and penalties.

If Biden lets this Trump policy take effect it would be a huge benefit to clients of Rettig's old law firm and others like it. And it would make an already unfair tax system even more heavily tilted in favor of billionaires.

IRS Minimizes

Internally the IRS characterized the new favor for the rich as nothing more than a subtle change to comply with arcane civil service policy. But at least one high-level IRS manager saw through this façade and fought the plan, an email obtained by Raw Story shows.

What makes this Trumpian scheme diabolical is that on the surface, it appears to be a 50% increase in enforcement of gift and estate tax law, areas where cheating is rampant. Actually, it's the opposite.

Starting Thursday, July 1, the IRS will hire 71 new people to examine estate and gift tax returns.

The 137 IRS tax lawyers who do this work now are, in effect, highly trained colonels on the tax police force. They need sophisticated detective skills to understand the mind-numbingly complex trusts and other devices that lawyers like Rettig designed to hide money from the IRS.

Skills Downgrade

The new hires, however, won't be lawyers, only lightly trained "tax specialists." They will be equivalent of mere corporals on the tax police force, lacking the legal education required to see through the fog of confusion that tax lawyers get paid fat fees create so their clients can pay little to nothing in taxes.

Despite the severe downgrading in required skills, the new hires will get the same pay and benefits as the lawyers doing the work now. The new hires will also be eligible for promotion and to move on to other jobs in the civil service, unlike the existing auditors.

It makes no sense to pay the same wages and benefits for reduced skills. On second thought, that does make sense when the purpose is to create the appearance of increased tax law enforcement while doing the opposite.

This stealth plot to help the super-rich comes just days after Raw Story revealed a nearly total collapse of audits of super high-income Americans, those making on average $30 million each.

The IRS audited just 38 of the 26,517 households in this rarified income strata in 2018. Recommended additional taxes after audit fell 99.1% from 2010, my analysis of new IRS data tables found.

Our new expose comes after ProPublica and The New York Times published separate reports showing how many of the wealthiest Americans pay little to no taxes. Raw Story revealed how this forces everyone else to subsidize their lifestyles. All these reports dealt in part with weak enforcement of the tax laws regarding the highest income and wealthiest Americans.

Billions Become Pennies

Tax lawyers, like Rettig before Trump put him in charge of the IRS, help clients reduce or eliminate gift and estate taxes through a host of complicated legal devices. They include intentionally defective grantor trusts, split-interest arrangements, life insurance trusts, and several dozen other techniques that distort the time-value-of-money to shield dynastic wealth from taxes. Tax lawyers like Rettig reduce billions of dollars to pennies.

These devices enable dynastic wealth but at the price of inhibiting future economic growth and make it harder for new generations of wealth creators to arise, as Warren Buffett told me in 2001. Economic oppression from trying up wealth in trusts was a driving force in the bloody French Revolution of 1789.

The gift and estate tax laws are crucial backups to the income tax system, which Congress was told as far back as 1924 by Representative William R. Green, an Iowa Republican and longtime chairman of the House Ways and Means Committee.

Detecting these tax avoidance tricks and then figuring out how much tax is due requires sophisticated skills, especially in understanding legal doctrines and court decisions. The new hires need only minimal training, none of it in contract law.

So, while it appears the IRS is beefing up its auditing power, it is simultaneously moving to assign the work to employees less likely to detect cheating and when they do much easier to dupe. Imagine your local police department announcing it would no longer hire homicide detectives but instead assign future murder cases to patrol cops.

IRS Executive Fought Plan

The existing auditors are classified as "905" employees. The new hires will be classified as "901" employees.

Karen L. Sumler, the IRS executive who oversees the examination of gift and estate taxes, fought against the downgrade.

"I pushed back hard," she wrote in a June 16 email to her subordinates. "I provided documents from the decision back in 1967" to use attorneys to examine gift and estate tax returns to try and stop the plan. She said the IRS Chief Counsel "was unmoved."

After she lost that battle Sumler fell in line, writing about "a big change" as "a new opportunity.

Because of civil service rules, hiring lawyers as gift and estate tax examiners requires approval from the Treasury Department general counsel.

Treasury refused such permission when Trump was president. Biden or Treasury Secretary Janet Yellen can order that policy rescinded, which would allow the IRS to hire 71 lawyers instead of ill-trained "tax specialists" at the same pay.

If Biden lets this policy proceed, he is tacitly declaring that he supports Trump-era policy to help the wealthiest Americans pay less tax. That would be a betrayal of his campaign and White House promises to reduce unfairness in the tax system and require those making more than $400,000 per year to pay more to support the government which made their wealth and income possible.

Just stopping the plan from taking effect would give the Biden administration time to understand this scheme. The question is whether Biden will do what he promised or reveal himself to just be another politician who tells voters what he thinks they want to hear and then doesn't act.