How could the IRS punish Trump?

The New York attorney general sued President Trump and his foundation on Thursday. But his bigger problem might be with the Internal Revenue Service (IRS).

The lawsuit accused Mr Trump and three of his children of using the Donald J Trump Foundation, a nonprofit charity, for political and business purposes, even though he signed federal tax returns swearing that wasn’t happening. Attorney General Barbara D Underwood referred her findings to the IRS for further investigation.

Any involvement of the IRS puts in play a range of possibilities. The agency has the power to bring civil penalties, and its investigation could lead to federal criminal charges.

Similar behaviour has prompted federal prosecutions, according to lawyers who have worked on such cases.

In 2007, Vincent Fumo, then a powerful Democratic state senator in Pennsylvania, was indicted by the Justice Department for misusing a charity run by a former member of his government staff. A federal jury convicted him. Mr Fumo’s punishment: four years in prison.

The lawsuit by the state attorney general, filed in New York’s Supreme Court, claims that Mr Trump’s charitable foundation was used to help his 2016 campaign and to pay legal settlements involving his businesses. The foundation was supposed to be solely for dispensing money to non-profit organisations and other activity in the public interest.

The suit seeks to dissolve the foundation and have its funds disbursed to unnamed charities. The action did not seek criminal penalties against Mr Trump or his three eldest children, Donald Jr, Ivanka and Eric, who are among the foundation’s board members and are named as defendants in the suit.

The Trump Organisation — the foundation itself has no employees — said that “virtually every dollar donated to the foundation went to worthy causes, and helped any number of the most vulnerable among our citizens”.

Mr Trump on Twitter attacked “sleazy New York Democrats” for filing the lawsuit. “I won’t settle this case!” Mr Trump wrote.

The investigation’s referral to the IRS theoretically could expose Mr Trump to a wide range of potential punishments.

For example, the IRS could seek to revoke the foundation’s tax-exempt status. The agency could even do so retroactively, which would stick the foundation with a corporate tax bill going back years.

Ms Underwood’s petition noted that Mr Trump signed the foundation’s tax returns, in which he stated, under penalties of perjury, “that the foundation did not engage in transactions with interested parties, and that the foundation did not carry out political activity”.

That is the sort of information that investigators would weigh in determining whether he should be charged with filing a false tax return, according to attorneys who have worked on criminal cases that were investigated by the IRS and brought by the Justice Department. They said that Mr Trump could be especially vulnerable because of his repeated involvement with the foundation, directing it to spend money on specific activities.

“People have gone to prison for stuff like this, and if I were representing someone with facts like this, assuming the facts described in this petition are true, I would be very worried about an indictment,” said Jenny Johnson Ware, a criminal tax attorney in Chicago. Ms Ware has represented clients investigated for filing false charitable tax returns as well as wealthy individuals in tax disputes with the IRS and the justice department. “If I were representing someone who had committed these acts, who was not president of the United States,” she said, “I would be looking to negotiate a resolution.”

The attorney general’s suit said the Trump Foundation was used at least five times for “self-dealing” — making payments to settle Mr Trump’s business disputes. That could violate a law prohibiting the use of nonprofit charities for private interests.

The suit also cites a campaign event in Iowa where $2.8m (£2.1m) was raised for the foundation. Senior campaign staff controlled how and when those funds were eventually spent, the suit said.

Marcus Owens, who ran the IRS division that oversees non-profits during the administrations of presidents George Bush and Bill Clinton, said there have been several cases where people were criminally prosecuted for filing false tax returns of charities they controlled. The difference in Mr Trump’s case, he said, is that those cases were “less egregious.”

In the case of Mr Fumo, the Pennsylvania state senator, the charges included filing a false tax return, using the charity to fund political activities and paying for a renovation of his office. A jury convicted him of all 137 counts he faced. He served four years in prison and was on probation until 2017.

In 2011, federal prosecutors brought a criminal indictment against an official at the nonprofit overseeing the Fiesta Bowl, one of college football’s major bowl games, for using money collected by the group to make political contributions to Arizona politicians, alleging she had directed the filing of false tax returns. The defendant pleaded guilty and received probation.

“The Fiesta Bowl was innocuous in comparison” to the activities of Mr Trump’s foundation, Mr Owens said, noting that the president’s charity was accused of repeated misconduct.

“It’s a pattern of behaviour over years,” he said.

In addition to signing the foundation’s tax returns, Mr Trump also “directly participated in the events that should have been accurately reported on the tax return,” Mr Owens said. “This is not a good case to try to defend.”

Typically, agents at the IRS would investigate a potential criminal matter like this. And, if the agency thought it warranted prosecution, it would refer the investigation to the justice department, which could then send the matter to a local US attorney’s office to seek an indictment.

Mr Trump’s nominee to head the IRS, Charles P Rettig, has more than 35 years of expertise working on such matters as a tax attorney who specialises in criminal defence. He is still awaiting Senate confirmation.

At a minimum, tax attorneys said, the IRS could seek civil penalties totalling about 20 percent of the funds that were allegedly misused. In the case of the single Iowa event, such penalties would total about $560,000 (£421,000).

A more drastic option in the civil realm would be to impose what’s known as a “termination tax” on the foundation. Such a penalty is equal to the organisation’s remaining assets — meaning it would entirely drain the foundation’s coffers.

New York Times