Here is a precis of what you would need to know about Tim Geithner’s Social Security tax issue if you were a member of the United States Senate:
From 2001 through 2004, Mr. Geithner worked for the International Monetary Fund. The IMF does not pay U.S. taxes, including the employer portion of Social Security and Medicare (“FICA/HI”) taxes. To avoid lost revenue for our government (and lost Social Security benefits for employees), the Internal Revenue Code defines compensation from international organizations as “self-employment income” for FICA/HI purposes only. I.R.C., §§1402(c)(2)(C) and 3121(b)(15). (For income tax purposes, it is just ordinary compensation from employment.) Self-employment income is subject to SECA tax, which is twice as high as FICA/HI, because it includes the taxes levied on both the employer and the employee.
If the IMF complied with its legal obligations (and no one alleges that it didn’t, though I haven’t seen copies of the documents myself), it issued a Form W-2 each year to Mr. Geithner, showing his salary in Box 1 (gross wages) and nothing in Boxes 3 and 5 (wages subject to FICA and HI, respectively).
The IMF generously grosses up its U.S. employees’ compensation, that is, gives them an extra allowance to cover their U.S. tax liabilities related to their pay. One of the taxes covered by this allowance is one-half of SECA tax (the portion that would ordinarily be borne by an individual’s employer). Every pay stub that Mr. Geithner received included an entry for “SE Tax Allowance”.
Each year Mr. Geithner submitted a “Tax Allowance Application” to the IMF treasury department. It included this representation:
I wish to apply for tax allowance of U.S. Federal and State income taxes and the difference between the “self-employed” and “employed” obligation of the U.S. Social Security tax which I will pay on my Fund
income . . . . 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 allowances from the Fund. [emphasis added]After all that, Mr. Geithner did not pay any SECA tax on his IMF income until he was audited by the IRS in 2006. He then paid up for 2003 and 2004. The earlier years were closed by the statute of limitations.
(The Washington Post’s Web site has copies of pertinent documents.)
Mr. Geithner’s explanation of his SECA non-payment is a reprise of Steve Martin’s famous “I forgot” defense. Specifically,
If I had thought about it more carefully at the time, and I’d asked more questions — I would have gone back and asked a bunch more questions about that, and I would have approached it differently.
While a lot of speculation has appeared about how it was possible to make such a mistake, I think that there are only two plausible explanations:
One, of course, is that Mr. Geithner noticed that no FICA/HI wages appeared on his W-2 and was savvy enough to realize that his ignoring SECA would be unlikely to alert the IRS computers. There are a number of situations in which W-2’s show wages in Box 1 but not in 3 or 5, and in some of those
Not paying was, if one considers it, a fairly safe gamble. If the IRS turned out to be screening for discrepancies in this area, the computer would send an inquiry, whereupon the taxpayer would simply file an amended return and pay a little interest and penalties. If there was no screening, the only risk was the fairly small chance of being audited before the statute of limitations expired. Enough international organization employees took this gamble that the IRS eventually instituted a crackdown. Ann. 2006-95, 2006-2 C.B. 1105 (Nov. 17, 2006).
Assuming that the Treasury Secretary-designate was not a deliberate tax cheat, he plainly had enough information from the IMF to be aware that he had SECA tax liability. Where he probably went astray was in being unable to figure out how to report it. His salary was ordinary compensation, entered on line 7 of Form 1040. It may not have been instantly obvious that he was supposed to file Schedule SE, as that form normally is used only by filers who have self-employment income of the kind shown on Schedule C.
I suppose that he stared at the form, browsed TurboTax’s Help function, found nothing blindingly on point, and finally gave up and let the whole thing slide. I’ve had clients who acted no more sensibly in comparable circumstances.
Not being a Senator, I need not have an opinion on whether this probably innocent act of nonfeasance ought to disqualify Mr. Geithner from high office. The opinion that I do have is that the financial markets are less forgiving of lazy innocence than the IRS.
Addendum: There is, of course, one very powerful argument in favor of confirming Timothy Franz Geithner, tax problems or no: He is a financial genius who can rescue the world economy from impending chaos. If only he’d been in a position to do something last September, say, head of the New York
What’s that? Really?
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