Treasury pick failed to pay taxes

Confirmation impact unclear for Geithner

Timothy Geithner would oversee the recovery package.

WASHINGTON - President-elect Barack Obama's pick for Treasury secretary, Timothy Geithner, failed to pay more than $30,000 in Social Security and Medicare taxes over a four-year period, a revelation that could damage his credibility and hurt his chances for an easy confirmation.

Two years of unpaid taxes were discovered during a 2006 audit by the Internal Revenue Service, and another two years of unpaid taxes were found during a background investigation by Obama's transition team before Geithner was nominated in late November. If confirmed, Geithner would oversee Obama's massive economic recovery package and lead a department that includes the IRS.

Yesterday, Geithner told members of the Senate Finance Committee in a private meeting that he has paid the IRS $43,200 in taxes and interest to account for the lapse, a Democratic official said last night. He also disclosed that he employed an immigrant housekeeper whose legal work status lapsed for the final three months she worked for him in 2005.

Obama stood by Geithner yesterday, issuing a statement through a spokesman that he is "the right person to help lead our economic recovery . . . He's dedicated his career to our country and served with honor, intelligence, and distinction. That service should not be tarnished by honest mistakes."

But the revelation was a stunning development and a potential blow to the portrayal of Geithner as an economic wunderkind, who is slated play a leading role in pushing through Obama's economic stimulus program, which the president-elect has made the early focus of his administration.

Geithner, president of the New York Federal Reserve Bank, was undersecretary of the Treasury for international affairs during the Clinton administration from 1998 to early 2001. He then went to work at the International Monetary Fund, where he was director of policy development.

As president of the New York Fed, he's been directly involved in the bailout of financial institutions over the past few months. In that role, Geithner generally has the support of Wall Street, which many believe is critical to stabilizing the economy. Shifting to Treasury secretary would allow him to step right into the push for the stimulus package and other Obama economic initiatives.

It was too soon to tell last night whether Geithner's nomination would be scuttled by the disclosures. Senate Finance Committee chairman Max Baucus, whose panel would conduct the confirmation hearings, said yesterday that "these errors were not intentional; they were honest mistakes."

Senate majority leader Harry Reid characterized the matters as "a few little hiccups" and was "not concerned at all." Some Republicans joined Democrats in expressing support for Geithner, with Senator Orrin Hatch of Utah saying he was satisfied with Geithner's answers.

But the finance committee's ranking Republican, Senator Chuck Grassley of Iowa, believes the revelations are "serious, and whether or not it's disqualifying is to be determined," spokeswoman Jill Kozeny said. And other GOP senators were waiting to gauge public reaction.

The matter was particularly sensitive given the perception that the country is anxious for quick, bipartisan action on the economy and might not be in the mood for a protracted fight over the Treasury nominee.

"You don't want this kind of revelation about a Treasury secretary-designate," said Peter Morici, a University of Maryland professor who frequently testifies before Congress on financial matters. "It casts a shadow over his nomination, and he is going to have to explain himself."

Some independent tax specialists said that Geithner should have known that he was required to pay Social Security and Medicare taxes when he worked at the International Monetary Fund, which does not withhold the taxes from paychecks of US citizens as happens at most companies.

"He should know better," said Boston University law professor Alan Feld, who specializes in tax law. "It is hard to explain and it is embarrassing for somebody in his position. The collection of taxes is a difficult enough job without your top man falling down personally on that job."

Geithner was audited in 2006 by the IRS, which found that he had not paid the Social Security and Medicare taxes that he owed for 2003 and 2004. Geithner then paid the back taxes, plus interest of $17,230, and was not required to pay a penalty.

But the Obama transition team found in its review of Geithner's record that he also owed the same taxes for 2001 and 2002. Geithner repaid those as well, sending the IRS $25,970 in back taxes and interest.

Feld said there is a three-year statute of limitations on tax matters, meaning that the IRS probably would not have examined whether Geithner owed taxes in the earlier years. But Feld said there is nothing in the law that would have prevented Geithner from informing the IRS that the same problem might have occurred in the two earlier years and paying those taxes.

Documents compiled by the Senate Finance Committee showed that the IMF gives employees an allowance to help pay their payroll taxes as self-employed workers. An IMF handbook instructs employees that "you pay the employee's share of US social security taxes."

An Obama transition official declined to comment publicly about the matter. The transition team instead paraphrased Geithner's portrayal of what happened, asserting that at one point he did his own taxes and did not catch the error, and at another point was misinformed by an accountant.

Geithner is the second Obama Cabinet nominee to run into trouble. Earlier this month, New Mexico Governor Bill Richardson withdrew his name as commerce secretary after questions surfaced about a federal investigation regarding contributions and a state contract.

Material from Globe wire services was also used in this report. Michael Kranish can be reached at kranish@globe.com