Trump immunity from IRS audit shocks experts, who warn it could undermine trust in tax system

NEW YORK (AP) — Remember Donald Trump’s response in the 2016 presidential debate, when Hillary Clinton blasted him for paying virtually no federal taxes?

“That makes me smart,” Trump said.

By that logic, Trump is looking smarter than ever now.

On Tuesday, the Internal Revenue Service agreed to drop all pending probes of Trump over whether he’s paid his fair share of taxes, to settle a lawsuit brought by the president over a leak of his tax returns. That could include, assuming it was ongoing, a long-standing audit into a technique Trump reportedly used to avoid paying taxes years ago that could have hit him with an estimated $100 million bill if the IRS found wrongdoing.

Trump has repeatedly denied he did anything wrong and has blasted the IRS investigation as politically motivated, without providing proof.

Details of IRS audits are not public and the merits of each side’s arguments are impossible to tell. But the way the president’s case against his own government’s IRS was resolved is highly unusual, experts say.

Trump sued the IRS, a federal agency within his administration, putting him in the unusual position of challenging an agency overseen by the executive branch he leads — a rare move, experts say, and possibly unprecedented. Then that agency decided, in another unusual move, to grant him immunity.

The immunity deal

Under the settlement to resolve Trump’s $10 billion lawsuit over the 2018 leak of his tax returns to The New York Times, the U.S. is “forever barred and precluded” from examining or prosecuting Trump, his sons and the Trump Organization’s current tax filings, according to a one-page document released Tuesday. That was quietly added to an original settlement establishing a $1.8 billion fund to compensate people whom Trump thinks were improperly investigated by the government.

Tax experts say this grant of immunity is shocking in the breadth of protection it offers the president and could undermine confidence in the fairness of the tax system.

“This is an unprecedented remedy,” said former IRS Commissioner Daniel Werfel, noting that Trump should be treated like every other American. “People expect the same tax rules and enforcement framework to apply to everybody.”

That $100 million bill

The IRS probe revolved around whether Trump doubled-dipped in cutting his taxes, according to a 2024 report by The New York Times and ProPublica — specifically whether he used the same losses from his Chicago skyscraper to cut them twice in future filings, a big no-no.

The report said Trump could owe more than $100 million, including penalties, if he were to lose the audit battle.

Now the Justice Department has moved to “wipe his slate clean,” said tax expert Brandon DeBot, calling that an “extraordinary action” in the message it sends to the country.

“The president and his affiliates might not pay the taxes they should,” said DeBot, policy director at New York University’s Tax Law Center. “This is giving the president and his affiliates completely different set of rules than everyday taxpayers.”

Cutting taxes to zero

The immunity is especially useful to Trump. His company includes hundreds of separate businesses, making his tax returns complicated. He also has a reputation for aggressively cutting his taxes, which some experts find suspicious — and at least in one case deemed now illegal.

After his Atlantic City casinos collapsed under heavy debt in the mid-1990s, for instance, Trump claimed about $1 billion in losses to cut his tax bill, even though lenders had forgiven hundreds of millions of dollars he owed. Trump argued the debt was never technically forgiven because he had exchanged equity in the bankrupt casino business for it — a tax maneuver Congress later barred as an abusive tax loophole.

Through that technique and other tax shelters and deductions, Trump was able pay just $750 in federal taxes in 2016 and 2017, and zero in 2020, according to a congressional investigation after his first term.

How the IRS has treated other presidents

Despite hinting that he may now release his tax returns, Trump has previously refused to do so, saying he can’t while undergoing an IRS audit — but there is no law barring him from doing that. In fact, presidents for decades have done so voluntarily and all have had their returns audited as a matter of IRS policy.

That policy began in the late 1970s in a post-Watergate crackdown on presidential abuses after Richard Nixon was found to have claimed dubious deductions — including a donation of his personal papers — that led to big underpayments. One year while president, he paid only hundreds of dollars.

When asked about his tax maneuvers, Nixon famously retorted, “I am not a crook.” He later agreed to the IRS findings, and paid hundreds of thousands of dollars in back taxes.

Court challenges

Trump’s settlement with the IRS refers only to existing audits, not future examinations, so the president and his family are not off the hook for any alleged abuses in future tax returns.

Parts of the settlement are being challenged in court.

The compensation fund is being attacked by police officers who helped defend the U.S. Capitol from Trump’s supporters on Jan. 6, 2021. They have sued to block anyone — including the rioters — from receiving payouts.

Some law experts expect the tax immunity will be challenged in court, too.

“This is the president trying to play every role in the system, acting as plaintiff, defendant, and his own judge and jury to extract extraordinary windfalls,” said New York University’s DeBot, adding that giving broad immunity “stretches beyond what DOJ actually has authority to do.”

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Hussein reported from Washington.