Geithner’s Tax Headaches

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Treasury Secretary-designate Tim Geithner has been meeting this afternoon with the Senate Finance Committee to discuss two problems that have come to light regarding his personal finances. One of them involves a failure to pay self-employment taxes when he was working for the International Monetary Fund; the other, his employment of an immgrant housekeeper whose work authorization document had expired.

The meeting with the Senate Finance Committee, which will be holding his confirmation hearing in two or three weeks Friday (NOTE: the committee announced this hearing date on Tuesday night, suggesting it was satisfied with Geithner’s explanation) next Wednesday (NOTE: C’mon, guys. Set a date and stick with it.), was called at Geitner’s own request. Jay Newton-Small reports that, at the end of it, most Senators filed out without commenting. However, two of them–Utah Republican Orrin Hatch and Michigan Democrat Debbie Stabenow–said they continue to support the Geithner nomination.

Here’s my understanding of what prompted all of this, based on sources in the transition operation and on Capitol Hill:

Before becoming President of the Federal Reserve Bank of New York, Geithner worked for the International Monetary Fund in 2001 and 2003. While he had paid all of his income taxes on his IMF earnings, he failed to pay self-employment taxes. (Geithner had initially done his tax returns himself, but an accountant preparing an amended return in 2002 also failed to catch the mistake.) Geithner voluntarily corrected that mistake upon discovering it on November 21, 2008, during the Obama transition vetting process, and paid an additional $25,970 as a result.

The confusion over the self-employment tax arose from an unusual system used by the IMF. Though its U.S. employees receive W-2s, they have been treated for tax purposes as though they are self-employed. (This problem has occurred frequently enough that in November 2006, the IRS made a settlement offer to all U.S. employees of embassies and international organizations in order to bring the employees into compliance with their U.S. tax obligations. )

Geithner had earlier encountered the same problem. It had come up in an IRS audit in 2006, under slightly different circumstances. Geithner worked for the IMF until the fall of 2003, and also received a small amount of income from the IMF in early 2004. An accountant prepared Geithner’s 2003 and 2004 returns and assured him in writing that he was exempt self-employment taxes on his IMF income. In 2006, the IRS informed Geithner that he owed–and had failed to pay–self-employment taxes for that period as well. He paid tax and interest totaling $17,230 (of which $14,847 was tax and $2,383 was interest) for the two-year period, and the IRS waived all penalties.

The second problem: In 2004 and 2005, Geither’s family employed a housekeeper to clean their home, and verified when upon hiring her that she had a valid permit to work. What he didn’t know was that this document expired three months before she left his employ to have a baby. (She continued to reside legally in the United States, was married to a U.S. citizen, and was granted a green card a few months later.)

UPDATE: A statement from the Obama transition office:

“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 by honest mistakes, which, upon learning of them, he quickly addressed. 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,” said incoming White House press secretary Robert Gibbs.

UPDATE2: Jay Newton-Small sends this report by email:

Baucus just came out and gave a statement underlining his support of Tim Geithner. He said he has known about the issue for several weeks and he and Grassley used the time to do a thorough investigation. A joint report will be issued shortly. “Though serious, I do not believe these problems endanger the nomination,” Baucus said. “The country needs a Treasury Secretary.” Schumer said he expects a confirmation hearing in 2-3 weeks. “It’s not at all disqualifying,” he added.

UPDATE3: You can read the Finance Committee memo on all this here.