Geithner’s Tax Troubles: There’s Much More, and the Press Is Virtually Ignoring It

Sometimes you learn a lot from commenters.

I was going through the comments tonight at my Pajamas Media column about the Geithner nomination that went up earlier today, and came across this at Comment 39 from "Mike M":

The deduction he took for the summer camp as a day care expense is EXPRESSLY PROHIBITED IN THE IRS CODE! That’s out and out tax fraud. Even Leona Helmsly (sic) is jealous in her grave ....

Summer camp!?

It turns out that there is a lot more to the Geithner story. It has been sitting right there in details that were made public last week, but were mostly ignored by the Washington press. While the amounts involved aren't anywhere near as large as those relating to Geithner's self-employment taxes from 2001 through 2004 on his earnings at the International Monetary Fund -- taxes he didn't pay until audited by the IRS (2003 and 2004) or until just before his nomination was announced (2001 and 2002) -- they are nonetheless revealing, infuriating, and disturbing. They make the claims of "honest mistakes" that his defenders up to and including Barack Obama continue to employ look much, much weaker (paragraph image is from Pages 3 and 4 of the relevant report stored here as a PDF; a larger JPEG image is here):

Let's start with the 10% early withdrawal penalty. One of the dumbest things anyone saving for retirement can do is to withdraw, or "cash in," part or all of their tax-deferred retirement plan balance. When someone does that, they have to report the amount withdrawn as taxable income to Uncle Sam and most states (including Maryland, where Geither apparently lived during his years with the IMF). On top of that, the taxpayer has to pay a penalty of 10% of the amount withdrawn. It appears that Geithner reported the amount withdrawn as income, but "forgot" to pay the penalty.

Once again, something Geithner and his supporters want characterize as an "honest mistake" looks like tax evasion. It is virtually inconceivable that a financial guy like Geithner would not have learned about the penalty on tax-deferred retirement plan withdrawals in his 20-plus year career. His failure to record and pay the penalty on his return is more than mere negligence.

But this situation goes beyond tax evasion, and provides a possibly troubling window into Geithner's personal financial situation.

Congress created the current taxable treatment of withdrawals, and added the 10% penalty, to prevent retirement savers from whimsically liquidating funds meant to be used during one's golden years. It forces those who go this route to pay a very steep price in hopes that they will be deterred (all too many aren't).

Since it is mentioned first in the report, I suspect that the penalty represents the largest element of the $4,334 of tax that was not paid. If the penalty was, say, $2,000, this would mean that Geithner withdrew $20,000, and paid about $7,000 in federal and state taxes (assuming federal rates of 28% or 33% plus roughly 5% for Maryland). If he had paid all of his taxes and the penalty on time, Geither would have ended up salvaging about $11,000 of the original $20,000. Since he didn't pay the penalty until audited, he initially came away with $13,000.

Considering the impact, you don't withdraw a retirement-plan balance as Geithner did unless you're financially unsophisticated (supposedly not the case here; after all, the New York Times's Andrew Ross Sorkin called him "a 47 year-old wonder boy"), or unless you're in very difficult financial straits. What caused him to do something so financially dumb?

Perhaps the answer lies in the second item, the recapture of the Section 179 depreciation deduction in a discontinued business. What happens here is that tax law allows a business to immediately deduct expenditures on capital equipment that would ordinarily have to be depreciated (i.e., gradually deducted over time). But if the taxpayer does that, the business needs to keep and use the equipment over its estimated useful life. If that doesn't happen, either because you sell the equipment or go out of business before the end of its estimated useful life, you have to "undo" a certain percentage of the deduction originally taken, and pay tax on that amount.

This amount of tax involved may be minor, but the larger question is whether Geithner lost money on a business venture, and how much. There's obviously nothing wrong with that, but it would be nice to hear what happened, and how much it might have cost him.

If business losses didn't cause him to withdraw retirement-plan money, what did?

Let's skip the next few items and go to the final one, the dependent child care credit. As Pajamas commenter "Mike M" said, the IRS's explanation is very clear cut (bold is mine):

Parents Can Get Credit for Sending Kids to Day Camp

Here’s a tax break for the busy summer. Many working parents must arrange for care of their children under 13 years of age during the school vacation period. A popular solution — with a tax benefit — is a day camp program.

The cost of day camp can count as an expense towards the child and dependent care credit. Expenses for overnight camps do not qualify. If your childcare provider is a sitter at your home or a daycare facility outside the home, you'll get some tax benefit if you qualify for the credit.

This Geithner gambit caused the Washington Post's Marie Cocco to hit the roof last week at the paper's Post Partisan blog:

It’s the sleep-away camp that goes beyond the definition of simple mistake.

..... It’s the audacity that’s the problem.

Millions of families do without decent child-care for their children while they’re at work. Millions send their kids to untrained and unlicensed daycare providers. Some put older siblings -- kids who are ten or twelve, sometimes younger -- in charge of younger brothers and sisters. The child-care tax credit is a small and hardly adequate way in which a limited portion of expenses can be recouped, but only if they’re incurred when parents are working or looking for work.

Sleep-away camp sure doesn’t count. It’s a luxury for affluent kids, not a necessity the taxpayers subsidize. ..... this one reeks of something worse than sloppiness. It’s that sense of entitlement we’ve seen all too often.

If this is all news to you, it's not your fault. As far as I can tell, with the exception of Cocco's critique and this January 21 Bloomberg article, the Associated Press, the New York Times, and other media outlets haven't mentioned any of this.

The non-coverage excuse that the amounts involved are relatively trivial compared to Geithner's self-employment tax problems simply doesn't fly. There's a 15-year record of nonpayment of taxes, including frequently failing to pay them even when advised that they are due; deduction-mongering ranging from overly aggressive to obviously wrong; and a terribly expensive retirement plan-related financial move that is ordinarily a telltale sign of financial distress. To use favored media phraseology, we're seeing a "disturbing pattern that leaves many questions unanswered."

Not the least of those questions is why Barack Obama, if he really knows all of these things, wants Geithner so bad, and is willing to risk his own credibility and his perceived squeaky clean reputation among a large percentage of the populace (yeah, I know it's undeserved, but it's there) to get him.

It would be nice if the press and/or cowed Republicans would hold the hosannas long enough to find out.

Cross-posted at BizzyBlog.com.