Saturday, January 31, 2009

more private tax errors by a public official

Last week it was Treasury Secretary Geithner. This week it is former Senator Tom Daschle, the nominee for Secretary of Health and Human Services, who is in the hot seat during his confirmation hearings, under scrutiny for tax errors.

The cost of Mr. Daschle's errors was even larger than Mr. Geithners: over $128,000.

The biggest error in his taxes was due to an incorrect 1099-MISC form for non-employee compensation (i.e., self-employment income) for his work as a consultant for one of the companies that hired him. Apparently, the payer inadvertently reported on 11 months worth of payments, when Mr. Daschle actually received 12 monthly payments that year. The error was attributed to a temporary accounts payable clerk at the payer during the month in question.

But self-employed taxpayers have an obligation to keep good records and to report all their revenues, whether or not it was reported to them on a 1099-MISC. This is especially true for a taxpayer as highly paid as Mr. Daschle, who has made over $5 million in the past two years and can certainly afford to hire a conscientious bookkeeping service to maintain his independent set of records, which should have been reconciled against the 1099-MISC.

The other major tax issue facing Mr. Daschle was the issue of taxable "non-cash compensation," specifically the services of a car and driver provided by a company that hired him. If the car and driver had been exclusively for business use, it would not have been taxable, but Mr. Daschle acknowledges that 80% of his use of the car was personal, not business use, so he is liable for income taxes and self-employment taxes on 80% of the value of those services.

Some non-cash compensation is considered "de minimis" and therefore non-taxable--for example, the value of a turkey that an employer may give his employees at holiday time, the value of an occasional personal phone call made at the office, etc.

However, the value of the car services was certain not de minimis--and he ultimately paid over $100,000 in tax on it, according to news reports.

In an interesting note, when he went over his old tax records during the nomination process, he discovered the error and voluntarily paid income tax, interest, and penalties on the amount of the non-cash compensation, but he apparently neglected to pay self-employment tax on it until the Senate Finance Committee staffers screening his tax paperwork pointed it out. He plans to pay it now, which will bring the total of taxes paid late even higher.

In his case, the only self-employment tax that would have been due was the self-employed Medicare tax of 2.9%. This omission is somewhat ironic, since he is under consideration for Secretary of Health & Human Services, which oversees the huge and growing Medicare program.

My guess is that many typical American taxpayers likely agree with this comment on a Wall Street Journal blog:

There are two tax rules; one for the politicians and another for the average citizen. Sad to see so many high level politicians evading taxes. Its ironic that the new Secretary of Treasury who is responsible for tax enforcement is also cheating on his taxes. Cant we find any honest people that pay their taxes to fill these important government positions? Or are politicians innately crooked or is it just this new administration?

I don't believe that Senator Daschle's tax errors are evidence he is "crooked," but I do think it's time for public officials to set an example with a higher standard of careful recordkeeping and accountability for their personal taxes.

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