TurboTax Tim

As of a week or two ago, I wasn’t going to publish a post about Tim Geithner, the new President’s nominee for Secretary of the Treasury. It annoyed me that Geithner had neglected to pay some taxes in past years, but the initial consensus seemed to be that Geithner had made an “honest” mistake or “common” mistake. (Rush Limbaugh put together a very funny montage of at least a dozen mainstream media commentators all using these same words.)

The more I have read and heard this week, however, the more I've wondered just how “honest” or “common” this mistake really was. And the longer his hearings continued, the more troubled I've grown about seeing this man entrusted with the massive new authority and discretion that has been granted to the Treasury secretary in recent months. Given the appalling lack of transparency that has accompanied the TARP program thus far, the Treasury secretary must be more than a person with a brilliant intellect or financial understanding. Now, more than ever, that position must be filled with an individual of unquestioned honesty and integrity, who has never tried to evade the law for personal gain. The more I learn about the circumstances surrounding Geithner’s tax returns, the harder it is to imagine entrusting him with that authority.

What was the nature of Geithner’s “honest” mistake? Because his employer, the International Monetary Fund (IMF) was a foreign entity, the employer did not withhold payroll taxes (the “FICA” you see on your paycheck) for the IRS. Unlike employees of American firms, Geithner and his American colleagues got to keep their entire paychecks. But those FICA taxes still needed to be paid. Geithner’s explanation is that when he entered his W-2 form into Turbo Tax, the software didn’t compute the FICA taxes due --- only the income taxes. He paid what Turbo Tax said he owed, and the discrepancy wasn’t caught until he was audited a few years later. The auditor realized the FICA taxes had never been paid, and Geithner was charged (and paid) the appropriate amount. A good early overview of the story can be found here.

Of course, it turns out that there is more to the story. The IMF clearly explained the FICA withholding issue to its employees--- in writing. And instructed them that they needed to pay the FICA taxes when they filed their 1040. And had each American employee sign a statement affirming that he had satisfied his tax obligations. Does this sound “honest” to you? Read this report and decide for yourself:

The IMF did not withhold state and federal income taxes or self-employment taxes — Social Security and Medicare — from its employees’ paychecks. But the IMF took great care to explain to those employees, in detail and frequently, what their tax responsibilities were. First, each employee was given the IMF Employee Tax Manual. Then, employees were given quarterly wage statements for the specific purpose of calculating taxes. Then, they were given year-end wage statements. And then, each IMF employee was required to file what was known as an Annual Tax Allowance Request. Geithner received all those documents.

The tax allowance has turned out to be a key part of the Geithner situation. This is how it worked. IMF employees were expected to pay their taxes out of their own money. But the IMF then gave them an extra allowance, known as a “gross-up,” to cover those tax payments. This was done in the Annual Tax Allowance Request, in which the employee filled out some basic information — marital status, dependent children, etc. — and the IMF then estimated the amount of taxes the employee would owe and gave the employee a corresponding allowance.

At the end of the tax allowance form were the words, “I hereby certify that all the information contained herein is true to the best of my knowledge and belief and that I will pay the taxes for which I have received tax allowance payments from the Fund.” Geithner signed the form. He accepted the allowance payment. He didn’t pay the tax. For several years in a row.

Question 18 that the Senate Finance Committee submitted to Geithner puts all this together: You provided the Finance Committee with statements from the IMF breaking your tax allowance down into amounts for “Federal Tax Allowance,”” State Tax Allowance,” and “SE Tax Allowance.” These statements show that your tax allowance was deposited into a checking account. You also provided the Committee with copies of checks made out to State and Federal revenue authorities for the exact same amounts as noted on the statement from the IMF for make state and federal estimated tax payments. Did you ever question what your “SE Tax Allowance” was for? When you were writing checks to cover the “Federal Tax Allowance” and “State Tax Allowance,” did you ever think “SE Tax Allowance” was given to you to pay a tax you owed?

Read Geithner's answer and decide for yourself whether you believe him...and, if you do believe him, whether he is the "financial genius" who is the only man qualified to run the Treasury Department today: Looking back now, it is clear to me that the IMF statements to which you refer should have prompted me to realize that it was necessary for me to file a form SE and pay selfemployment taxes. I did not realize this and regret the error.

This story has a particular resonance for me because I am self-employed and have considerable experience preparing my own tax returns. Coincidentally, I have also been using Turbo Tax, and think it is outstanding. Over the years, I have become familiar with the various reportings that my clients are supposed to make to the IRS, using Form 1099, and the taxes I must pay --- even when the client, for whatever reason, fails to report the income to the IRS. I still have a moral obligation to pay those taxes, and have always paid those taxes, even when the IRS doesn't know about the income.

And that’s what is so frustrating about the Geithner situation, and why it has struck such a chord with all of us who are self-employed and have diligently reported and paid taxes on all of our income. Given all the warnings and notices that Geithner's employer gave him, it seems he simply couldn’t have not known he owed the FICA taxes. It's hard to escape the conclusion that he saw an opportunity to keep for himself tens of thousands of dollars, banking on the odds that he wouldn’t be audited. Does this sound like the sort of man who ought to be entrusted with overseeing the IRS --- not to mention being entrusted with disbursing hundreds of billions of dollars' worth of TARP funds?

I don’t expect perfection or sanctity from our government officials, but there ought to be some threshold of behavior which, once crossed, disqualifies a person from receiving the public trust. Would we tolerate an Agriculture Secretary nominee who had illegally obtained food stamps for his family four separate times, even if he reimbursed the program once he was caught? Or a state insurance commissioner who padded four different casualty insurance claims, even if he later reimbursed the insurance companies once he decided to run for insurance commissioner?