Geithner's 'common' tax error

In the efforts to dismiss Treasury Secretary-designate Timothy Geithner's tax problems as a little more than an embarrassing speed bump on the way to confirmation, supporters have repeatedly characterized his tax error as a common one.

Barack Obama made a just such an argument in Geithner's defense on Jan. 14.

"Look, is this an embarrassment for him? Yes," Obama told reporters. "He said so himself. But it was an innocent mistake. It is a mistake that is commonly made for people who are working internationally or for international institutions. It has been corrected. He paid the penalties."

Here’s the quickie background: The IRS audited Geithner in 2006 and found that he failed to pay self-employment taxes on compensation he received as an employee of the International Monetary Fund for tax years the IRS was looking at, 2003 and 2004 (by law, the IRS could not audit him for years before 2003). So Geithner paid $16,732 in back self-employment tax, plus interest. The IRS waived penalties for those years.

Then in late 2008, when Obama made known his intention to nominate Geithner to his Cabinet, the presidential transition team vetted Geithner and discovered a few more problems in Geithner's tax returns, including the fact that in addition to not paying self-employment taxes in 2003 and 2004, he also didn't pay them for 2001 and 2002. So in December 2008, Geithner voluntarily amended his tax returns for those years and wrote a check to the IRS for another $25,970. His nomination followed immediately after.

The question here is whether Geithner's failure to pay self-employment taxes related to his employment at the IMF was a common problem.

By some accounts, it can be confusing for IMF employees to figure out their tax obligation. As an international organization, the IMF is exempt from the FICA and Social Security taxes that most Americans get deducted from their paychecks automatically. U.S. nationals who work for the IMF in the United States are required to pay them on their own, and do so by filing as self-employed taxpayers.

"It is a strange situation," said the Tax Policy Center's Eric Toder, who admitted that he has struggled trying to figure out his own tax obligation when he did some consulting work for the IMF.  "You wouldn't know from looking at the tax forms what you are supposed to do."

Some Republicans note, however, that the IMF gave ample documentation to its workers about what they should do. The Senate Finance Committee overseeing Geithner's confirmation hearing posted several documents given to Geithner by the IMF designed to help employees understand their tax obligations.

For one, there's the IMF Employee Tax Manual given to new hires, which describes how to pay self-employment taxes. The IMF pays additional money to U.S. employees, on top of their regular salary, to offset self-employment taxes, and quarterly and year-end wage statements include the amount of self-employment taxes added to wage income. Lastly, IMF employees are required to annually file a form requesting the self-employment "gross ups" to wages.

Still, said Len Burman, director of the Tax Policy Center, "the rules are just really complicated. I suspect this really was just an honest mistake."

The Obama campaign hangs its argument that Geithner's was a "common mistake" on a Nov. 17, 2006, document in which the IRS estimates that as many as half the employees of foreign embassies, foreign consular offices and international organizations who are subject to U.S. tax "either fail to report their wages, claim deductions they are not entitled to, incorrectly establish SEP/IRA retirement plans, fail to pay self-employment tax or fail to file tax returns at all."

The IRS offered a one-time settlement to these employees to pay up, with interest. No penalties would be levied, and the IRS said the employees would not be required to pay beyond three years back.

Geithner's audit came before that settlement, but since the deal specifically includes employees of international organizations (like the IMF) failing to pay self-employment taxes (as was the case with Geithner), Obama would seem to be on firm footing.

But does that 50 percent estimate apply to IMF employees specifically?

William Murray, a spokesman for the IMF, doubts it.

"There has been no indication of widespread noncompliance by IMF employees," Murray said.

There's no question the tax obligations for IMF employees can be confusing, particularly for new hires, Murray said.

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"Mistakes happen," he said "But not paying taxes? That is not common."

It's extremely rare for the IRS to garnish an IMF employee's wages due to failure to pay taxes, Murray said. But other than those being garnished, the IMF has no way of knowing how many others are misreporting their taxes. Geithner's audit, for example, would not have triggered any notification to the IMF, he said.

Bottom line: It's impossible to know exactly how many, or what percentage, of the IMF's employees fail to pay their self-employment taxes. You might argue that even if half of the employees at international organizations (IMF or any other) failed to pay self-employment taxes, you would hope the guy heading up the U.S. Treasury would be among the 50 percent to get it right.

Nonetheless, the IRS did generally flag employees of international organizations failing to pay self-employment taxes as a problem area. So we think Obama was on pretty firm gound when he called it common. And so we rate his statement Mostly True.