The Inside Story of How We Reported the Secret IRS Files — ProPublica

In late July, ProPublica hosted a virtual event with reporters and editors to talk about our reporting on the U.S. tax system. Thus far, the series has focused on how the ultrawealthy use legal stratagems not available to average Americans to avoid paying what many regard as their fair share of taxes. The stories that we’re collectively calling The Secret IRS Files have inspired calls for reform in Congress and ignited a national discussion around tax fairness and wealth inequality.

Here are some excerpts from that event, featuring panelists:

• Stephen Engelberg, ProPublica editor-in-chief.
• Tracy Weber, ProPublica deputy managing editor.
• Jesse Eisinger, senior reporter and editor at ProPublica.
• Paul Kiel, reporter covering business and consumer finance for ProPublica.

The conversation was moderated by ProPublica’s president, Dick Tofel, and includes a lively set of audience questions selected by Connor Goodwin, our interim communications director.

Tofel: Jesse, what you can tell us about how we got this data and what we understand about why?

Eisinger: We received this vast trove of information. We’re unfortunately not talking about this in great detail. The reason we’re not talking about it is that one of the top principles of being journalists is to protect sources, especially if those sorts of sources seem to have taken some risk to get you information that you believe is in the public interest. So we received some information, and my first experience with it passed the initial smell test. It looked like a massive amount of information about taxes. It looked real, it had jargon, it had words that the IRS uses.

The reason we were told we had received it is that Paul and I had done an extensive series of stories on the gutting of the IRS. In 2018, we looked at how Congress had stripped the IRS of its budget and how that had led to an exodus of revenue agents, the kind of auditors who really understand taxes and looked at corporations and the wealthy in particular.

One result was that, as Paul’s fabulous story showed, the chances of being audited if you were a member of the working poor in the United States was greater than if you made the affluent salary of about half a million dollars, which was pretty stunning. That’s why we believe we got this information. The first call I made was to Paul to say, if this is true, this is probably one of the most memorable days of your journalism career. And I think it has proven out to be the case.

Tofel: As you explained, we’re not talking a lot about the sourcing. However, the other thing that readers and listeners and viewers should know is: We don’t actually know who the source is.

Eisinger: Right. What was important to us was whether the information was true, and whether it was newsworthy. The provenance of it never struck me, speaking personally, as very important. I’ve been a reporter for a very long time, especially in the financial markets. People have bias and agendas when they give me information. The task before us was to figure out whether this vast trove of information in incomprehensible jargon-filled numbers was real, and that was really something that only Paul Kiel could do.

Tofel: So how did we do that? How did we authenticate this?

Kiel: We spent a lot of time with the data initially, just trying to figure it out, because it was given to us in a way that wasn’t tailored. We didn’t have a seminar to sit down and understand, like, how do you use this data? We had to figure that out for ourselves.

In terms of verification, there are a number of ways we did it. One is we were able to contact people who are in this database. The other way is, this is a vast amount of information. It’s not just tax returns. It’s also things like records of stock trades, information that is sent to the IRS about financial activities. Sometimes that stuff surfaces in public — forms that might be in a lawsuit, that’s one place to look. It might be in disclosures that companies make through SEC filings. So we were looking at a lot of these different places.

Tofel: How did we decide generally what to do with this data and why? Or maybe to put it another way, as you think about this and help shape these stories: What is the central point of what we’re reporting here?

Weber: We get this massive trove of some of the richest people in history and their taxes, and you could just say, let’s look at what their taxes said. But we have a public service mission. And we could see in there how some of the richest people in our country were living outside the tax system, that they were employing all sorts of techniques that are not available to most of us in order to sidestep the tax system altogether. If you have a Jeff Bezos, or other people who are among the richest people, and they are either not paying taxes or paying a tiny amount of taxes while their wealth is skyrocketing, and we’re seeing evidence of that all over, how should we be thinking about that?

We’re all paying taxes, we don’t really feel we have a choice, but it’s for the greater good. We’ve got crumbling roads, we’ve got bridges falling in disrepair. And here’s a portion of people that aren’t paying into that thing as we are.

A lot of people said when the stories came out, “Oh, I knew that.” But actually, what we have is evidence. Having actual figures that showed what was going on was incredibly valuable to show the public, to show Congress. They had no idea that Peter Thiel had $5 billion in a Roth IRA. The average Roth IRA is $39,000.

Tofel: Obviously, these are very sensitive stories, there are a lot of people who are unhappy that we’ve done this. How did you think about this? How did you decide to publish this? And what sort of guardrails did you put on it?

Engelberg: This was a very tough call on a lot of levels. These are people who, in good faith, sent their tax and personal and private information to the Internal Revenue Service with no expectation that it would ever be made public. And so I think the question you have to ask is, Who are journalists to say that it should be? We felt that the guiding light here ought to be the public interest. The public interest in what’s happening is so powerful and so important that it was necessary to put some human faces on what are otherwise sort of incomprehensible aggregate numbers.

In a couple of cases, some of the people whose numbers we’ve put out there have actually spoken before of the need for tax reform, specifically Warren Buffett. It’s interesting and noteworthy that Warren Buffett, you know, wrote his famous New York Times op-ed piece talking about the rate that he was paying being lower than his secretaries’. And he actually said how much he was taxed in that particular year.

Tofel: What has the reception been so far to these stories?

Kiel: As we do these stories, we are giving a tip, essentially, to Congress of things they could be looking into, and a number of senators have called for hearings. One aspect that I think was very not-well-appreciated before the story about wealth and taxes was the extent to which the wealthy can borrow against their stock holdings at very low interest rates. That is a broadly understood and embraced form of tax avoidance. That is just a glaring hole in the income tax system.

Tofel: And so Jesse, what kinds of steps might be taken realistically to deal with this? As we noted in the first story, this country does not have a wealth tax and the history around the world recently of wealth taxes is pretty problematic. So let’s leave that aside. Without having a straight on wealth tax, what are the kinds of things that would address this?

Eisinger: There’s one thing that we haven’t mentioned about Congress right now, [which] is that there was a burgeoning movement to increase the budget of the IRS to reverse the decline in this one powerful agency. And now Republicans have turned against that, and there’s been a movement to not give the IRS more funding the administration has requested. So one, that’s one reaction that’s happening now.

In terms of the larger picture, there are kind of immediate potential reforms, and then larger, much more complicated issues. The Roth IRA is actually a relatively easy problem to solve. If Congress wanted to solve it, you could say, after a certain amount of money — say $500,000 or $5 million — then the rest is not tax-free anymore. Or you could say, you can only put in publicly traded readily available liquid investments, you can’t put in your founders stock in your tech startup into your Roth IRA. Those would be two very simple, achievable reforms.

As for grappling with wealth inequality and taxation of the wealthy, it’s a much more complicated question, as you alluded to, because countries have struggled to implement wealth taxes. Politically here, of course, Elizabeth Warren and Bernie Sanders have competing proposals that are pretty similar, and they’ve gotten almost no political traction. Biden doesn’t support a wealth tax.

There are more arcane proposals. [Senate Finance Committee Chair Ron] Wyden has a proposal that’s quite sophisticated to tax unrealized gains, the kind of wealth that the Jeff Bezoses and Elon Musks and Warren Buffetts of the world have accumulated. But again, that has really very little political traction in America today.

Goodwin: This reader asks, “Is the American tax system purposely arranged to empower the ultrarich to avoid taxes? Or have Congress and the IRS just been outfoxed? Or is it some combination of those two?”

Kiel: There’s a history aspect of that, which I’ll let Jesse field, and then there’s how things developed over time, which is a question I can take. Tax breaks that have been built into our system over time, and the end result is this amazingly complex system of rules. It can be sort of mind-bending, working through these rules, particularly when it gets to business income for wealthy people. And that is an intentional result. That complexity in general redounds to the benefit of wealthy people who have tax professionals to help them exploit that complexity.

Then the flip side is with the less income you have, taxes can get more complicated. That’s because of the benefits that have been written in the tax system to try to send money to poor people. It’s an odd system where it’s actually pretty complicated to do your taxes if you’re very poor, it gets a lot easier as you get to middle income, then it gets externally more complicated as you go up the income scale. People on the upper end of the income scale, they get to exploit the complexity, as opposed to the bottom end, where it’s a burden, and it actually affects our ability to get benefits to people.

Eisinger: The history is long and complex. I would say that the original income tax, which was passed in the early part of the 20th century, and then ratified by constitutional amendment in 1913, was a response to extraordinary wealth and income disparities that were revealed in the Gilded Age of the time. The aim was to have the wealthy pay their fair share. It was not a wealth tax, and it was not meant to strip the wealthy of their wealth, but to have them pay based on the income.

Over the years, the super wealthy have developed techniques to avoid income. And this was not really true in, say, the 1950s, where income tax rates were extremely high, and many wealthy people derived much of their wealth from their annual income. There was underlying wealth, of course, but there was a lot of income, too. Over time, the ultrawealthy through changes in our economy, and changes in tax rates, changes in regulation, changes in government enforcement — all of these things came together to increase both income inequality and wealth inequality. The income tax universe was not designed for the way the wealthy have their wealth today, but it wasn’t designed purposely not to tax them.

Goodwin: What can be done to empower the enforcement of the IRS and/or shield it against political pressures?

Kiel: One way to help is to give them money. There are a lot of problems that bedevil us that are difficult, and this is not one of them. There’s a kind of arcane Congress budget solution to the issue of how to insulate them. They bring in most of the revenue for the government; they could keep money through enforcement, they could have a special fund, you could budget for several years ahead of time. There’s lots of things that could be done if Congress wanted to do them. The clear message the last 10 years is: Republicans don’t want to give money to the IRS because they don’t want the IRS to do a job that is unpopular with certain Republicans. They don’t want them to do audits at a certain level.

Goodwin: One reader wonders when you received this information, which is a violation of privacy, if that set off alarm bells in the newsroom and if you ever talked about the legality of handling these returns or this data?

Tofel: One of my roles is I am the company’s chief legal officer. There is a law that forbids the disclosure of this kind of information. But it is our strong belief, based on Supreme Court precedent, that when we had no role in removing the information from the control of the IRS, as we did not, and when we did not solicit it, as we did not, that the publication of it when it is in the public interest, as we strongly believe that it is, is protected under the First Amendment. Put another way, the application of that law to someone in ProPublica’s position would be unconstitutional.

Goodwin: Can you speak a little bit more about what’s in the data? People were curious about how many people were listed and if there’s any discernible criteria for what was included.

Eisinger: You can thumbnail it as the 1% of the 1%. We don’t have waitresses and plumbers, and even doctors and lawyers, we have a thin slice of the wealthiest Americans.