Thursday, January 15, 2009


It is now all over the news. President-Elect Barrack Obama’s pick for the Treasury Secretary, Timothy Geithner, failed to pay more than $34,000 in taxes over the 2001 through 2004 tax years. The brewing controversy has apparently postponed his confirmation hearing until next Wednesday, one day after Obama’s inauguration.


The issue first arose for Geithner in 2006 when the IRS audited his 2003 and 2004 tax returns. The audit revealed that he failed to pay Social Security and Medicare taxes while working for the International Monetary Fund. The same issue existed for the years 2001 and 2002, however, Geithner did not correct those errors at the time of the audit. Eventually, after he was chosen by Obama to serve as the Treasury Secretary, Mr. Geithner paid the additional tax that should have been paid in 2001 and 2002.

Did Geithner Do Something Wrong?

In deciding whether to fault Geithner for the late payment of the 2001 and 2002 taxes, the Statute of Limitations on the assessment of additional tax should be considered. Depending on the circumstances, the Statute of Limitations may have expired on the 2001 and 2002 tax years by the time the IRS audited his 2003 and 2004 tax returns (in 2006). [Generally, the Statute of Limitations on assessment of additional tax is ordinarily 3 years from the date the return is filed. The limitations period increases to 6 years where a return omits from gross income more than 25% of the gross income.] If the Statute of Limitations had expired, the IRS would have been prohibited by law from increasing Geithner’s taxes for these earlier years. This assumes, of course, that Geithner did not fraudulently understate the tax he owed. When fraud is present, the Statute of Limitations is unlimited. (Note, I am not saying fraud…I’m just saying “if”.)

If Geithner is determined to have deliberately underpaid the tax, then he should not be confirmed as Treasury Secretary. Obviously, that would send a terrible message to the taxpaying public. The news reports tell us that the error on Geithner’s return is somewhat common for employees of international bodies. The news also tells us that the IMF repeatedly wrote to Geithner telling him that he would owe Social Security and Medicare tax. Yet, as I understand it, the IRS waived any penalties due on his underpayments. This means that the IRS has already, in some sense, exonerated him from any deliberate wrongdoing.

If, as Geithner claims, the underpayment was a mistake, then it would not be unusual for someone to leave the earlier tax years alone. If the Statute of Limitations on assessing additional tax for 2001 and 2002 had expired, (which is probably the case), he could no longer be legally compelled to pay the missed tax. I do not believe that anyone in his situation would have done differently. I leave it up to the readers to decide if he should be given any “moral credit” for eventually paying the 2001 and 2002 taxes that he should have paid but could no longer be forced to pay.

Was it a mistake? Possibly. Apparently, Mr. Geithner had hired an accountant to prepare his 2004 tax return. Allegedly that accountant told him that he did not owe employment taxes. On the other hand, Geithner is reported to have prepared his own returns for the years 2001 and 2002. If Mr. Geithner truly missed the fact that additional tax was due, the error could serve as strong evidence that the tax laws are much too complicated. After all, if a man qualified to serve as the Treasury Secretary can’t get it right, how can we expect anyone else to?

So Now What?

When all is said and done, whether Geithner made a mistake or tried to get away with something, may be immaterial. It is the perception that the prospective Treasury Secretary didn’t pay his taxes that creates the problem. It is easy to imagine in the homes of many Americans on April 14, people will be preparing their tax returns and thinking “if the Treasury Secretary didn’t pay his fair share, why should I?” Obviously, this is a terrible perspective (and an illegal perspective) but should we really allow for a situation where the Treasury Secretary’s confirmation raises the question?

No comments: