Did Obama's Treasury nominee, Tim Geithner, weave a tangled tax web?

Last November when then president-elect Barack Obama tapped Timothy Geithner to take the reins as Treasury Secretary, Geithner's confirmation seemed like a slam dunk. But that was before the Obama team started vetting the nominee to make sure there would be no surprises.

Geithner has been hailed as a financial wizard after working in several Treasury positions under three different presidential administrations, nearly four years at the International Monetary Fund (IMF), and most recently, as president of the New York Federal Reserve Board. So how did this financial wizard make what is being called an "honest mistake" amounting to a serious underpayment of income taxes?

Here's what happened

In his years at the IMF, 2001-2004, Geithner was paid large sums of money from which Social Security and Medicare were not withheld, as is a customary practice at the IMF. Because of this practice, the IMF instructs recipients that they need to report the income and pay self-employment tax of 15.3 percent on the money, just like any self-employed taxpayer would be required to do. But there was one difference. In addition to the untaxed money, Geithner was permitted to request additional funds to pay the taxes. To get the additional funds, he had to sign a form each year certifying that he would use the funds to pay the taxes. He signed the form, received the funds to pay the taxes, but did not pay the taxes.

In 2006, when the IRS audited his 2003 and 2004 income tax returns, the omission for those two years was noticed, and Geithner then paid the overdue taxes and interest, amounting to $17,230. The IRS waived penalties. Since his tax returns for 2001 and 2002 were not targeted for audit, the fact that the exact same circumstances also applied to those years, resulting in significant unpaid taxes went unnoticed by the IRS, and undisclosed by Geithner.

When Obama's vetting team discovered this fact and notified Geithner, he immediately paid tax and interest of $25,970 on November 21, according to Obama transition officials.

Originally it was hoped that Geithner's nomination would be confirmed on January 20th, Inauguration Day. Because of this tax glitch, the nomination was then pushed to Friday, January 23rd. But... in spite of the tax issues and questions from some Senators, the confirmation hearings got underway this morning, January 21st, and are expected to result in a clear path for Geithner.

Both Republicans and Democrats in the Senate are calling this an "honest mistake," and predicting that it will not cause a long delay. But researchers at the Wall Street Journal would like to see the matter pursued further, based on the policy the Democrats have pushed since they took control of Congress, of closing the "tax gap," which is the amount between taxes owed and taxes collected.

Democrat Senator Max Baucus, Finance Committee Chairman, has referred to the tax gap as "an affront to all the rest of us who pay our taxes." But in Geithner's case, he says "this is an honest mistake and it's clear there was no intention not to pay," and adds that Geithner's confirmation is "a given."

The Wall Street Journal, on the other hand, calls Geithner "the living embodiment of the tax gap."

After the revelation of the tax problems, the Obama vetting team uncovered another issue. Geithner and his wife employed a part-time housekeeper who, at the time of hiring was verified as having authorization to work in the United States. Three months before she quit to have a baby, her work authorization expired, a fact which seems to have been unknown to the Geithners. The housekeeper was married to a U.S. citizen at the time, and was later issued a Green Card. On its own, this matter seems unlikely to result in a delay of Geithner's confirmation.

Given the fact that Geithner was warned by the IMF of the need to report the income and pay the taxes and was also provided money to pay the taxes due, these problems seem unlikely to be overlooked. Even so, Some Democrats are predicting that the matter will ultimately be brushed off as "honest mistakes." If that happens, it could clear the way for Geithner to be appointed as head of the department responsible for enforcing the same tax code which he violated, and to which rank and file Americans are held responsible.

Robert Gibbs, incoming White House press spokesman was quoted in the press as saying, "The President-elect chose Tim Geithner to be his Treasury Secretary because he's the right person to help lead our economic recovery during these challenging times. He's dedicated his career to our country and served with honor, intelligence, and distinction. That service should not be tarnished. He made a common mistake on his taxes, and was unaware that his part-time housekeeper's work authorization expired for the last three months of her employment. We hope that the Senate will confirm him with strong bipartisan support so that he can begin the important work of the country."

What is the press saying about the "honest mistakes?"

Brian Carney of The Wall Street Journal speculated in an online interview about the appropriateness of a guy who is supposed to be a financial whiz, tapped to save our economy who cannot understand the tax system himself. "If he can't figure it out, maybe we need a simpler tax system," said Carney who seemed disturbed that ordinary Americans are held to a higher standard than the man who will be enforcing the tax code.

In the run-up to Inauguration Day, the Washington Post - generally friendly to Democrats - speculated that Timothy Geithner is not the 'change we need' and President-elect Barack Obama should withdraw his nomination.

With Democrats and some Republicans in the Senate insisting Geithner's tax issues were "honest mistakes," it is probable that Geithner will be confirmed. At the very least, this is, as Obama admits, an "embarrassment" in the kickoff of his administration. Even so, Obama adds, "My expectation is that Tim Geithner will be confirmed."

Who prepared his taxes?

Geithner told Washingtonpost.com that he prepared his own taxes using tax software at home. Before the Senate nominating committee which convened on January 21st, Geithner was asked if the software he used directed him to pay the taxes... he answered that it did not, and that the fault was his, not the software. Of course, no software can direct a person to pay taxes on income unless that income is reported. It's not known at this time whether Geithner was asked if he reported the income (or the additional funds to pay the taxes).

In the Washingtonpost.com interview he offered what was his first public apology for his "honest mistakes."

"I should have been more careful. I take full responsibility for them. I have gone back and corrected the errors; I have paid what I owed. I want to apologize to the committee for putting them in the position of having to spend so much time on these issues when there is so much more pressing business before the country."

Is this a sign that, in the future, the IRS will be as forgiving of our "honest mistakes" as the Obama administration and the Senate appear to be of the guy who will be in charge?

Latest Developments:
The Senate Finance Committee has voted 18-5 to confirm Timothy Geithner's nomination for Secretary of the Treasury. The vote now goes to the full Senate and it is expected that they will confirm the nomination as well.
Updated Thursday, January 22, 2009

Related story:

You may like these other stories...

Ernst & Young 2013 audit deficiency rate 49%, regulators sayMichael Rapoport of the Wall Street Journal reported on Thursday that the Public Company Accounting Oversight Board (PCAOB) found deficiencies in 28 of the...
Some of your clients may get away to business conventions from time to time. It gives them a chance to rub shoulders with colleagues, catch up on the latest developments, and fine-tune their skills. And, when the meetings or...
PwC must face $1 billion lawsuit over MF Global adviceA federal judge on Wednesday ordered PricewaterhouseCoopers (PwC) to face a $1 billion lawsuit claiming that its bad accounting advice was a substantial cause of the...

Already a member? log in here.

Upcoming CPE Webinars

Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.
Sep 10
Transfer your knowledge and experience to prepare your team for the challenges and opportunities of an accounting career.
Sep 11
This webcast will include discussions of commonly-applicable Clarified Auditing Standards for audits of non-public, non-governmental entities.
Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.