An attorney whose accounting firm helped clients avoid paying billions in taxes is poised to take control of the Internal Revenue Service. It’s an ironic backstory for the man who Donald Trump named to be the nation’s tax-collector-in-chief. But nonetheless, on Monday, a little-known Treasury Department official named David Kautter will become interim IRS commissioner.
It’s unusual for an IRS commissioner to have experience running the tax practice of a Big Four accounting firm that helped clients fleece the IRS of over $2 billion in taxes. Kautter recently told a U.S. senator that he wished he had handled the situation—which he said played out without his knowledge—“differently.” And his ascent to the top of an agency who his co-workers once fleeced has watchdogs baffled and concerned.
Kautter’s LinkedIn biography says he was the director of the national tax practice for the accounting firm Ernst & Young from 2000 to 2010. In that role, he oversaw tax guidance for all of the firm’s federal and state tax work.
From 1999 to 2004, partners and managers at Ernst & Young mastered the art of creating tax shelters, according to a settlement the firm entered into with the Justice Department (PDF). They designed, marketed, implemented, and defended those shelters in order to slash the tax bills of their ultra-wealthy clients. They kept 200 clients from paying, in total, more than $2 billion in taxes. In return, those clients paid the firm $123 million.
Employees at the firm worked to keep the IRS from understanding their scheme, according to the settlement. In some cases, they told the IRS that the tax shelters were actually investments that had nothing to do with their clients’ tax liabilities. Employees also issued legal opinions as “penalty protection” for their clients, based in some cases on information those Ernst & Young partners knew to be false.
The scheme got the firm into huge legal trouble. In 2003, one former partner at the firm, Thomas Trauger, pleaded guilty to obstructing the examination of a financial institution. He had altered and destroyed records related to the law firm’s work. Another senior manager, Oliver Flanagan, also pleaded guilty to destroying documents that federal investigators were searching for.
And in 2013, the firm paid $123 million to the U.S. Treasury as part of its settlement with the Justice Department (PDF)—the amount of money those 200 clients paid for their tax shelter expertise, and a tiny fraction of the $2 billion their clients saved in taxes. That settlement was for tax-evasion activity that happened while Kautter was the head of the firm’s tax practice. As part of the settlement, the firm promised to cooperate with federal investigations of its employees.
A spokesperson for the Treasury said Kautter was not involved in the firm’s tax shelter work.
“As was made clear during his confirmation process, Dave was not involved in the design, drafting, delivery or review of tax shelters,” the spokesperson said.
But Kautter’s ascent to the top of the IRS, given his former firm’s tax shelter dealings, has left some watchdogs incredulous.
“Is it impossible to find a person to run the IRS who doesn’t have a background that includes working for a firm that paid a $100 million plus settlement to resolve a tax avoidance scheme?” said Scott Amey, general counsel of the Project On Government Oversight. “Kautter might be qualified, but others might have similar qualifications without the baggage. Once again, we see this administration naming people to senior positions who shouldn’t receive an interview.”
After 10 years at Ernst & Young, Kautter led a tax research institute at American University and then led the tax group of the auditing firm RSM US LLP. In 2017, President Donald Trump nominated him to be assistant secretary for tax policy at the Treasury Department. When he appeared before the Senate Finance Committee to be confirmed, Democrat Sen. Ron Wyden expressed misgivings about his nomination for that post (PDF).
“Through the vetting process for his nomination, Mr. Kautter said, essentially, this was not his job to do anything about these abuses,” Wyden said. “Taking him at his word, others in the firm may have approved these shelters, but I do not think it is appropriate to look the other way when confronted with evidence of wrongdoing.”
Wyden added that Kautter later told him he “wishes he had done differently” when he was at the firm.
Kautter has some tough choices ahead of him. As the most powerful official at the IRS, he may have to sign off on any deal that gets made between the agency and the hedge fund long helmed by billionaire Robert Mercer, one of President Donald Trump’s most generous donors. Bloomberg reported last month that the hedge fund is negotiating with the IRS over a tax bill that may top $7 billion. And The Daily Beast reported that the head of the IRS is all but certain to sign off on any agreement of that size.
So Kautter’s new position worries progressives.
“An IRS commissioner has the potential to tilt the scales in billionaire Trump donor Robert Mercer’s ongoing $7 billion tax dispute with the IRS, interfere with audits of Trump’s personal taxes, or undermine the IRS’s role in special counsel Robert Mueller’s investigation of Russian election interference,” said Kurt Walters, campaign director for the progressive group Rootstrikers.
Jeff Hauser, of the progressive Center for Economic Policy and Research, shared those concerns.
“Acting IRS commissioners are internal IRS promotions,” he said, “or at least that’s been the case until next Monday, when Trump is set to shove aside history and decency and install a glorified lobbyist for tax avoidance in charge of collecting taxes.”