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.

"Second Look" Program: VITA sites have "people" too

H&R Block has a big ad campaign promoting its Second Look Campaign.

In essence, they are capitalizing on the fact that even professional tax preparers make lots of mistakes. As this Wall Street Journal article "Tax Pros Get It Wrong Too" notes, error rates can be high: a government "secret shopper" survey turned up mistakes in 61% of the returns prepared at the commercial tax preparers they shopped.

So, for a $29 fee, taxpayers can bring their returns prepared by other preparers into H&R Block, which will give them a "Second Look" Review, designed to turn up any errors their preparer may have made. H&R Blocks says it turns up errors in 80% of the returns they examine in the Second Look program. Then the client has the option to pay even more money to H&R Block to prepare an amended return to correct the errors, either claiming an additional refund or paying the additional tax due.

H&R Block's slogan is "You've got people," and, indeed, I've met a number of professional tax preparers, from H&R Block as well as other tax prep businesses, that are very good.

But VITA sites have "people" too. We can do "Second Look" returns for free. In the past, clients have brought us returns prepared by other tax preparers to look over, and we have found mistakes and prepared amended returns for the client at no charge at all.

In some cases, where taxpayers come to us with complicated tax situations outside the scope of VITA training and certification, we do need to refer them to professional preparers.

Unfortunately, it's not necessarily easy to find a good tax preparer. There is NO certification or licensing process legally required. Anyone, even a convicted felon, can legally hang out or his her shingle as a "professional tax preparer," so it's very much a "buyer beware" situation. The risk is not just that a tax preparer may make mistakes in preparing a return, there are actually cases in which tax preparers have committed crimes of identity theft, filed deliberately fraudulent returns (and pocketed all or part of the client's refund themselves).

In cases in which we need to refer taxpayers to professional paid tax preparers, due to complex issues outside the scope of our certifcation, we can NOT recommend specific preparers, as a matter of IRS policy for VITA sites.

However, we can give taxpayers some general guidance on how to choose a tax professional:


IRS tips for choosing a tax preparer

LA Times Advice for choosing a tax preparer

(NOTE: VITA sites, despite their IRS training and certification aren't universally perfect either. "Secret shopper" visits to VITA sites have found mistakes at some VITA sites as well. A few years ago, the secret shoppers turned up errors at 100% of the VITA sites they visited. That error rate has fall several times in the past few years, and the most recent survey found a 31% error rate at VITA sites.

Those error rates are still way too high and unacceptable in my book. The costs of mistakes on a low-income taxpayer's return are very serious. Either the taxpayers get refunds smaller than they are entitled to, or they get too big a refund, which may expose them to the risk of repayment of the excess along with interest and penalties down the road.

That's why I insist on a four-step quality review process at our VITA site. (1) The preparer looks the return over carefully before turning the return over to a designated quality reviewer, (2) the designated quality review checks over a multi-page checklist of items, and (3) then the original preparer goes over the return line by line with the taxpayer, and (4) finally I look over the entire return carefully prior to efiling, if necessary checking again with the taxpayer for additional clarification.)