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Tax problem complicates Geithner's confirmation process

Many senators want a better explanation from Obama's would-be Treasury secretary about past underpayments. His hearing is delayed till after the inauguration.

January 15, 2009|Janet Hook and Christi Parsons

WASHINGTON — Though he was a prodigy in the world of economics, Timothy F. Geithner underwent an IRS audit in 2006 and ended up paying back taxes for a mistake in two years' worth of filings. That was embarrassing enough.

But just as he was about to be named to head the Treasury Department, a more awkward fact came to light: Geithner had made the same error in two earlier tax years and failed to fix it even after the audit.

Now the matter is complicating Geithner's confirmation process as senators wrestle with its meaning. Was it an honest mistake, as Geithner's supporters maintain? Or does it reveal a character flaw in the man President-elect Barack Obama chose to help solve the nation's economic problems?

Already, Geithner's confirmation hearing has been set back a few days, foiling Democrats' plans to have Obama's most important Cabinet officials installed on Inauguration Day.

Some of the Senate's most prominent members, GOP leaders among them, still support Geithner and blame his accountant for the whole mess. Geithner himself has told senators he can't explain why he didn't pay all his back taxes after the audit.

But pressure could mount if Geithner's explanation doesn't ring true for critics, a handful of whom aren't satisfied with the story coming out of Obama's transition team about how the error happened -- or how it went unresolved until shortly before Geithner was gearing up for a Senate confirmation.

"A lot of us are concerned that the guy who's going to be overseeing our tax system ignored our tax system," said Sen. Jim DeMint (R-S.C.). Based on what he knows now, DeMint said, he would vote against Geithner.

The hearings may well be transformed from a big-picture discussion of the crisis-ridden U.S. economy into a minute review of Geithner's personal finances. Geithner also faces questions about an immigrant household employee whose work papers expired while working for him.

But Geithner doesn't just have to convince skeptical senators, according to some members.

"It is incumbent on him to explain the details in a way that the American public can understand," said Sen. George V. Voinovich (R-Ohio). "He's going to have to have a very good explanation."

After Obama named Geithner to the position in late November, the 47-year-old head of the Federal Reserve Bank of New York appeared to be headed for easy confirmation. A key player in the Bush administration's response to the economic crisis, Geithner commands wide respect among conservatives. The Dow Jones industrial average rocketed 494 points on news of his possible appointment.

But in the process of vetting Geithner, the presidential transition team discovered that the nominee had not paid Social Security taxes when he worked for the International Monetary Fund from 2001 to 2003, nor in 2004, when he also received compensation from the fund.

The IMF does not withhold those taxes from its employees' pay, so employees are supposed to pay so-called self-employment taxes themselves.

IMF employees receive additional pay to cover those taxes, which they get after filling out paperwork. Geithner filled out, signed and submitted those papers, according to documents prepared by the staff of the Senate Finance Committee, which will hold his confirmation hearing. But he apparently did not use the money to pay the taxes.

In the 2006 IRS audit, auditors found the failure to pay for the 2003 and 2004 tax years, and Geithner shelled out $17,230 in overdue taxes and interest then. But the audit didn't cover the two earlier years, the transition official said, and Geithner did not go back and amend those tax returns on his own.

As soon as the transition team pointed out the error, Geithner paid the taxes that would have been due in those years, plus interest, according to a transition official.

The payment of nearly $26,000 came in on Nov. 21 -- the day Obama named him to head the Treasury Department, which oversees the IRS.

Aides to Obama say Geithner never tried to avoid paying his taxes.

After the audit, said the transition official, "Mr. Geithner was advised that he had no further liability for Social Security taxes on his IMF income."

"All of his taxes have now been paid in full," the Obama aide said, "and at no time was there any intention on Mr. Geithner's part to avoid taxes."

Added Sen. Max Baucus (D-Mont.), the finance committee chairman: "His accountant didn't serve him well."

Some Republicans say the Senate should confirm Geithner and set him to work.

"I don't think we could get a better person for that position," said Sen. Orrin G. Hatch (R-Utah), a finance committee member who said he had been deluged with conservative criticism for saying he would still support Geithner. "I'm getting chewed up by the right. I would caution critics on the right that he's as good as they are ever going to see from this administration."

Sen. Judd Gregg (R-N.H.) said time was of the essence.

"We need him on board sooner rather than later," Gregg said.

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