IMF Informed Geithner on Taxes

By JOHN D. MCKINNON and BOB DAVIS

Timothy Geithner, whose nomination as Treasury secretary has been delayed by his past failure to pay taxes, was repeatedly advised in writing by the International Monetary Fund that he would be responsible for any Social Security and Medicare taxes he owed on income he earned at the IMF between 2001 and 2004.

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Questions about Mr. Geithner's initial failure to pay more than $34,000 in taxes are clouding his prospects for confirmation. The Senate Finance Committee postponed Mr. Geithner's confirmation hearing from a tentative Friday date to next Wednesday, which means President-elect Barack Obama will take office without a Treasury secretary amid the biggest financial crisis in decades.

Current and former IMF officials said the fund provided numerous warnings to U.S. employees about payroll taxes. According to IMF documents released by the Senate Finance panel, Mr. Geithner regularly received information about his tax obligations.

Mr. Geithner didn't make any Social Security or Medicare tax payments on his income during the years he worked for the IMF, though he did pay income taxes. After the Internal Revenue Service audited him in 2006 and discovered the payroll-tax errors, Mr. Geithner corrected them for 2003 and 2004. Only after Mr. Obama picked him for Treasury secretary last fall did Mr. Geithner pay the Social Security and Medicare tax he owed for 2001 and 2002.

Mr. Obama offered a vote of confidence Wednesday that echoed a defense offered by transition officials a day earlier: Mr. Geithner made a mistake common to people who work for international institutions.

"Tim Geithner, when I [nominated] him, was rightly lauded by people from both sides of the aisle...as somebody who was uniquely qualified" to handle the economy, Mr. Obama said. "Is this an embarrassment for him? Yes. He said so himself."

It's possible some of Mr. Geithner's problems stemmed from bad advice. In 2004, an accountant advised Mr. Geithner in writing that he did not owe employment taxes. An accountant who reviewed Mr. Geithner's 2001 tax return also didn't inform Mr. Geithner he owed taxes, according to an Obama aide familiar with the situation.

Mr. Geithner wasn't available for comment Wednesday.

A number of senators, including Republicans, continued to express their support for Mr. Geithner. "These are not the times to think in small political terms," said Sen. Lindsay Graham, a South Carolina Republican. "He has a great résumé."

Others were more circumspect. "He may be a smart guy, but the average person on the street sees that he hadn't paid his taxes," said Sen. George V. Voinovich (R., Ohio). Senate aides said that Sen. Kent Conrad (D., N.D.), a former state tax commissioner and a Finance Committee member, wants to study Mr. Geithner's tax records and speak to the nominee.

Stuart Levey, currently a Treasury undersecretary for terrorism and financial intelligence, will effectively run the department until a successor for current Secretary Henry Paulson is confirmed.

As an international body, the IMF doesn't withhold taxes for U.S. citizens, and employees are responsible for paying their taxes. The IMF pays employees additional tax allowances to cover federal and state income taxes, and the employer's portion of payroll taxes.

Mr. Geithner prepared his own federal-tax returns during the first two years he worked at the IMF, 2001 and 2002, according to the Senate Finance Committee report.

"The IMF informs U.S. employees about their tax allowance and what it covers and doesn't cover -- and that includes paying your payroll taxes," said Michael Mussa, a former IMF chief economist, who is now at the Peterson Institute for International Economics. "The IMF doesn't leave this out."

An IMF booklet on taxes, which Mr. Geithner told the Senate panel he received, instructed employees that "you pay the employee's share of U.S. Social Security taxes."

Mr. Geithner's quarterly tax-allowance payments also included a statement of what the money was to be used for, and had an entry for "SE tax" -- meaning "self-employment" taxes. In a wrinkle in U.S. tax law, U.S. citizens at the IMF pay Social Security and Medicare taxes as if they were self-employed. Current and former IMF officials said that U.S. officials widely understood "SE tax" to mean payroll taxes.

Mr. Geithner "filled out, signed and submitted an annual tax allowance request worksheet with the IMF that states, 'I wish to apply for tax allowance of U.S. federal and state income taxes and the difference between the "self-employed" and "employed" obligation of the U.S. Social Security tax which I will pay on my Fund income,'" the Finance Committee reported.

U.S. IMF employees regularly requested "safeguard adjustments," to see if the IMF paid them enough to cover their taxes. An IMF finance-department official, J. Carter Magill, not only checked the tax-allowance payments, but would double-check tax returns to see if U.S. citizens had filled out their tax returns correctly. Mr. Magill, who is now retired, said he doesn't think Mr. Geithner used his service.

Tax professionals noted that even trained preparers sometimes miss the subtleties involved in taxation of employees of international organizations.

The IRS in late 2006 launched a settlement initiative aimed at noncompliant employees of foreign embassies, as well as international organizations such as the IMF. At the time, the IRS said as many as half of affected employees were out of compliance with tax rules in one way or another.

Write to John D. McKinnon at john.mckinnon@wsj.com and Bob Davis at bob.davis@wsj.com