Independent Contractor Compliance Blog - by Collabrus™

(Also see IRS Taxpayer Advocate Urges Congress To Simplify Taxes and Revise the IC Rules, posted below on January 20, 2009).

They were honest and unintentional mistakes.

Timothy F Geithner, the new Secretary of Treasury who oversees the IRS, can personally attest to the tax law’s complexity.  During his confirmation hearings it was disclosed that Mr. Geithner had fully paid his state and federal income taxes, but failed to pay both shares of Social Security Taxes and Medicare Taxes required of independent contractors. The original liability was $34,000 in self employment taxes but he was required to pay $48,000 in back taxes and interest to correct the error.

The IRS waived penalties for Mr. Geithner in 2006, according to an account provided by the Obama transition office and the Senate confirmation committee. (In my experience tax agencies waive penalties when the taxpayer is confused and makes honest, unintentional mistakes as a result of the law’s complexity).

Additionally, it was disclosed that his former housekeeper was in the country legally and was authorized to work when Mr. Geithner and his wife hired her in 2004, but her employment authorization expired during the period she was working for them. Showing that even a good hire can go bad if it isn’t monitored to insure compliance is maintained.

During the confirmation hearings several US Senators stated that honest mistakes as a result of the complexity of the tax laws are what caused Timothy Geithner to fall out of compliance with the IRS.

Mr. Geithner called the tax errors “careless, avoidable, and unintentional,” and he said he wanted to “apologize to the committee for putting you in the position of having to spend so much time on these issues.”

How did he fail to pay self employment (IC) taxes?

The underpayments all involve Mr. Geithner’s income as a senior official at the International Monetary Fund (IMF). The IMF is an international organization and does not withhold payroll taxes for Social Security and Medicare from its paychecks. American IMF workers are essentially treated as IC’s and are required to pay the self employment taxes themselves. However, the IMF does pay its American workers a supplemental amount equal to an employer’s half of the payroll taxes, with the expectation that they will use that to pay the IRS.

So what went wrong?

Geithner testified that he prepared his own return and that the tax errors are his own responsibility. Geithner said at the hearing that he was always under the impression that he was an employee, not a self-employed contractor, while he served as director of the Policy Development and Review Department for IMF.

The new Treasury Secretary seemed qualified to know the difference.

What are Mr. Geithner’s qualifications?

• He worked in the Treasury Department during three administrations since 1988 in various positions, including under secretary for international affairs from 1999 to 2001.
• Mr. Geithner was previously a senior official at the International Monetary Fund from 2001 until 2003.
• Mr. Geithner is credited with playing a crucial role in calming several global financial crises during the Clinton administration.
• Mr. Geithner received a bachelor’s degree in government and Asian studies from Dartmouth,
• He has a master’s in international economics and East Asian studies from the Johns Hopkins School of Advanced International Studies.
• He was also previously the president of the Federal Reserve Bank of New York.

So education and experience alone isn’t enough when you are not practicing compliance full time and it’s not your specialty.