Geithner Tax Woes Examined
MELISSA BLOCK, host:
The confirmation hearing for treasury secretary nominee Timothy Geithner has hit a snag. The Senate Finance Committee has postponed that hearing until next Wednesday, the day after the inauguration. The committee chairman, Max Baucus, says it's a given that Geithner will be confirmed, but Republicans on the committee forced the delay after revelations that Geithner failed to pay $34,000 in self-employment taxes when he worked at the International Monetary Fund or IMF. He has since paid those back taxes plus interest.
We've called on accountant Donald Williamson to walk us through the ins and outs of taxes and the IMF, and how what the Obama team is calling a common mistake might have happened. Williamson is the chair of the accounting department at American University. Welcome to the program.
Professor DONALD WILLIAMSON (Taxation; Director, Graduate Tax Program, Kogod College of Business Administration, American University; Principal, LaMonaca and Williamson): Thank you for having me.
BLOCK: And help us understand this, IMF employees receive a W2 form for tax purposes, but they're considered self-employed. Why is that?
Professor WILLIAMSON: That's because the International Monetary Fund, being an international organization, by statute is exempt from withholding tax and the need to pay employment tax on their U.S. citizens who are employees. So then, the law then requires the U.S. citizen, who is an employee, to file on their own to pay the equivalent of what a regular U.S. employer would have withheld for Social Security and Medicare.
BLOCK: And if I understand this right, IMF employees are paid extra to more or less cover these tax payments. On their paystub, you'll see the line self-employment tax allowance.
Professor WILLIAMSON: That's right. There is, what's called in the trade, a gross up because the employee is paying both the employee's half and the employer's half of the employment tax. The bank or the IMF grosses up, as they say, the wage of the U.S. person to make them whole.
BLOCK: How common a mistake do you think this is for employees like Mr. Geithner, IMF employees, for example?
Professor WILLIAMSON: Well, that's an interesting question. I would have thought that someone in Mr. Geithner's role and in his position would have been aware that this responsibility was upon him, particularly since he acknowledged that in a statement that he signed, authorizing IMF to gross up his wages. That said, those returns that he did were self-prepared, and sometimes it's difficult to properly prepare them and a mistake was made.
BLOCK: Yeah, he did do these himself for some years using, I guess,a tax program on the computer. Would a program like that typically kick out to you, and say, hey, you forgot to pay your self-employment tax?
Professor WILLIAMSON: Yes, it would have. Even the standard things that you'd buy at a drug store would have given you what we call them in the trade a diagnostic that when you went to print the return, they would have said, hey, wait a minute, there's no employment taxes being withheld.
BLOCK: He also apparently - Mr. Geithner also used a tax preparer for two of the years in question and it was the years that he was later audited for. And according to talking points from the Obama team, his accountant advised him in writing that he was exempt from self-employment taxes on his IMF income.
Professor WILLIAMSON: Well, if that's the case, that's his pass because I could understand a lay person not appreciating some of these technical rules that the IMF and the Internal Revenue code have. But if the accountant did give an opinion, I can understand Mr. Geithner accepting that opinion and not paying the tax.
BLOCK: Do you think the take-away lesson here is that, look, even a man who is likely to become treasury secretary has problems understanding the tax code.
Professor WILLIAMSON: The take-away on this, Melissa, as one who does tax returns for a living, is that you need to pick your tax return preparer very carefully.
BLOCK: Well, Professor Williamson, thanks so much for talking with us.
Professor WILLIAMSON: Thank you very much.
BLOCK: That's Donald Williamson, chair of the Accounting Department at American University. He also runs a private accounting practice.