How the super-rich defeated the IRS's crack Global High Wealth unit

In 2009, the IRS created a Global High Wealth Industry Group to audit the super-wealthy, staffing it with skilled lawyers and accountants who could unravel the webs of "trusts, foundations, limited liability companies, complex partnerships and overseas operations" that were used to hide the income of the super-rich from the tax-collector.

A decade later, the group's track record is dismal. IRS privacy rules mean that little is known about how the group's audits were undertaken, defeated, and then gutted, but Propublica's Jesse Eisinger and Paul Kiel have pieced together a vivid picture from the fragmentary evidence, showing why the project was "dead on arrival."

The case-study for the group is billionaire Georg Schaeffler, whose own tax lawyers warned him that a transaction was likely to attract IRS scrutiny, and who was eventually served with a $1.2 billion tax/penalty bill by the Global High Wealth unit in 2012 -- and who, seven years later, only paid "tens of millions" according to Propublica's sources.

Propublica delves into the court records to show how "battalions of high-priced lawyers and accountants that often outnumber and outgun" the IRS's team were able to draw out the case for years and years -- even as the Global High Wealth unit's headcount was being cut and cut by successive administrations. The unit was supposed to have 242 investigators by 2012, but by 2014, it was only 96, and today, it's only 58. This is despite the potentially massive upsides for the general treasury: it's estimated that the richest Americans cheat on their taxes to the tune of $50 billion/year.

It's clear that the group was sabotaged into uselessness. Its most prominent critic, Charles Rettig, is now Donald Trump's IRS commissioner.

Today, the IRS's own internal inspectors note with alarm that the agency is almost completely powerless to make the rich pay their share -- it's not even bothering to collect judgments it has won against the wealthy.

The American public are greatly in favor of higher taxes on the wealthy: both AOC's 70% marginal tax on income over $10,000,000/year and Elizabeth Warren's tax on households with $50,000,000+ in assets; these programs will require that the IRS receive more funding, but that will be easily recouped with the money they'll bring in from asset-hiding tax-cheats. We have the popular will, and after 2020, there's a good chance we'll have the political will, too.

The inspector general also criticized the IRS broadly — not just its high-wealth team — for not focusing enough on the richest taxpayers. In 2010, the IRS as a whole audited over 32,000 millionaires. By 2018, that number had fallen to just over 16,000, according to data compiled by Syracuse University. Audits of the wealthiest Americans have collapsed 52 percent since 2011, falling more substantially than audits of the middle class and the poor. Almost half of audits of the wealthy were of taxpayers making $200,000 to $399,000. Those audits brought in $605 per audit hour worked. Exams of those making over $5 million, by contrast, brought in more than $4,500 an hour.

The IRS didn’t even have the resources to pursue millionaires who had been hit with a hefty tax bill and simply stiffed Uncle Sam. It “appeared to no longer emphasize the collection of delinquent accounts of global high wealth taxpayers,” a 2017 inspector general report said.

In recent years, the number of Global High Wealth audits has been higher — it closed 149 audits in the last year — but tax lawyers and former IRS officials say even that improvement is deceptive. A major reason is that the audits are much less ambitious. “They were longer at the beginning and shorter as the process moved on,” Johnson, the tax attorney, said.

The IRS Tried to Take on the Ultrawealthy. It Didn’t Go Well. [Jesse Eisinger and Paul Kiel/Propublica]