Kevin Downing, a former defense attorney for Paul Manafort, famously exclaimed during Manafort’s criminal tax trial when cross-examining Manafort’s accountant that “only a fool would give that kind of information to the accountant” if trying to evade the IRS.
The ‘friendly’ subpoena recently served on the tax and accounting firm Mazars USA seeking client records related to Donald J. Trump and the Trump Organization may not have received much publicity. But of all the Trump-related investigations ongoing, this action could very well serve as the most troublesome for team Trump.
The written requests by Chairman Richard Neal (D-Mass.) of the House Ways and Means Committee sent to IRS Commissioner Charles Rettig sought six years of Trump-related tax returns pursuant to an anti-corruption statute dating back to the Teapot Dome scandal. The request sparked what promises to be a lengthy court fight over the release of Trump’s business and personal tax returns.
But in the opinion of this retired IRS Criminal Investigator, the pending legal fight between the Treasury Department and the House Ways and Means Committee is just political maskirovka – a smokescreen. Chairman Neal will eventually prevail and obtain the requested tax returns. But his committee will then have to analyze them under a cone of silence — the governing procedures require review in a separate enclosed room, after which the documents must be returned to their orange folders and placed in a safe.
Nothing about Trump’s tax returns or audits can be shared with the media or anyone under pain of serious civil and criminal penalties. That explains, in part, why none of the 80,000 or so employees of the IRS have leaked Trump tax information. For longtime politicians, knowledge of Trump tax information can be somewhat akin to teenage angst with regard to maintaining secrets regarding their best friend or worst enemy!
Ways and Means could eventually vote to publicly disseminate the Trump tax information, but the court cases could delay things until the months just short of the November 2020 Presidential election — a politically untenable time for sure.
The Mazars subpoena would encompass more information than the tax returns covered by IRC 6103, including financial statements, tax returns, and accounting work papers. Only tax returns in the possession of the IRS are subject to the vagaries of IRC 6103.
It should be noted that there is no accountant-client privilege equivalent to attorney-client privilege that could shield the secrecy of the financial documents maintained by Mazars for its client or that could provide a legal basis to delay compliance with the subpoena. The IRS does require tax preparers to obtain the client’s permission to release tax returns. However, should Mazars be in possession of 10 years worth of Trump business and personal tax returns, there is nothing in the law to prevent their ultimate disclosure to the public when Congress subpoenas them. A congressional ‘friendly’ subpoena requested by Mazars effectively shields them from the normal disclosure constraints of tax preparers.
Unlike Chairman Neal’s request for Trump tax returns from the IRS, Chairman Cummings probably expected a swift response to his subpoena to the Mazars. Trump’s legal team did file suit to prevent Mazars from immediately complying with their subpoena. Court fights are hard to prognosticate but the Trump team does not have a strong argument to interpose or delay the subpoena in a protracted court fight. As referenced above any argument asserted with reference to accountant/client privilege is weak. Congress does not recognize a binding attorney-client privilege on its proceedings, and a court opinion has upheld that view.
When Congress does, in fact, obtain the subpoenaed financial information from Mazars, it can then be released to the public via a majority vote on the Oversight Committee. Should that happen, let’s review what might be available and the relative significance of the financial documents.
Michael Cohen precipitated the subpoena to Mazars when he testified before Congress that Trump often manipulated his financial statements inflating his net worth at different times to mislead financial institutions who might lend to him and minimizing the value of his assets in order to reduce his real-estate property taxes. Cohen — who was employed as an Executive Vice President of the Trump Organization as well as Trump’s personal attorney, testified that he had first-hand knowledge of financial statement manipulation at Trump’s direction that raised serious bank fraud and insurance fraud concerns in his mind.
Given his status as a felon convicted of lying to Congress, the credibility of Cohen’s testimony would certainly be challenged in court. But his Congressional testimony “opened the door” and provided the House Oversight Committee with more than enough basis to subpoena Mazars to obtain the referenced falsified financial statements as well as justifying a deep dive into all things financially related to Trump maintained at Mazars.
Preliminary media reports indicate that Mazars did not certify certain Trump financial statements that Trump wanted to use to justify loan requests from banks, as prepared according to Generally Accepted Accounting Principles (GAAP). These financial statements could represent evidence of financial fraud and envelop Trump in yet another cloud of alleged wrongdoing.
Case in point: one financial statement submitted by Cohen to Congress contained the following warning written by Mazars: “Users of this financial statement should recognize that they might reach different conclusions about the financial condition of Donald J. Trump.”
An accountant’s work papers accompany the financial statements in most accounting files. The work papers normally reflect the accountant’s frank notes in preparing the financials, and most times include references to whatever directions the client communicated as to the purpose of the financials and how they were to be prepared and for what purpose. It would be the accountant’s work papers where one could find various drafts of net worth statements that would normally include listings of assets and liabilities owned and owed by the client. Copies of any communications — such as emails, texts, memorandum, notes — from the client would be incorporated in this file. The same would hold true with regard to any tax returns prepared.
These communications could provide a window into what Trump was thinking when he directed the accountant’s preparation of allegedly false balance sheets submitted to Deutsche Bank, as he attempted to obtain financing to buy the Buffalo Bills NFL franchise. Variance from the first draft of the financial statements to the final version submitted to the bank would be subject to question. And any notes explaining the variance would be material to an investigation.
In addition to the financial statements and accountant work papers, Congress could seek powerful testimony of the accountant with regard to the preparation of the financials.
Consider the power of Cindy Laporta’s testimony on the jury in the Paul Manafort criminal tax trial. Laporta was Manafort’s tax accountant and was being queried in court with regard to fake memos, backdated documents, and a draft forgiveness letter found in her file with regard to Manafort’s alleged sham loans concealing his unreported income (hence Kevin Downing’s exasperation). A memorable line of testimony sparked everyone’s attention when Laporta noted that “we can’t just pick and choose what’s a loan and [what’s] income,” she explained.
Another accountant for Rick Gates and Paul Manafort was Philipp Ayliff. Josh Gerstein of Politico noted that “much of Ayliff’s testimony was painfully tedious,” going over line after line of documents. But with the foundation carefully laid with documentary evidence, the prosecutor honed in and asked about possible foreign bank account ownership and activity by Gates and Manafort. Ayliff replied he “often asked Manafort and Gates about possible foreign accounts.” “They never told us about any income deposited in foreign accounts,” Ayliff said, in what must have been devastating testimony.
The fact that the Trump legal team recently intervened in the subpoena process by filing suit seeking to quash the Mazars subpoena in court suggests they sense a serious vulnerability that will likely be telling in due time. When Mazars is allowed to finally respond, it is likely that their response will answer the Kevin Downing question as to whether Mazars had a fool for a client. Then the question will be if any Trump-directed foolishness found in the Mazars financial files will threaten Trump’s political life.
We will see.