The Geithner Gross-up Gross-out

Several months ago, Al Franken blamed his accountant for his failure to pay state income taxes to several jurisdictions. Charles Rangel's accountant also seemed to be unaware of the rules on reporting rental income. Now Treasure Secretary nominee Geithner is blaming his accountant for his failure to pay employment taxes.  While the arcane rules that apply to US citizens employed by international agencies like the IMF may be beyond many practitioners, even a novice at income tax preparation is going to notice there was no normal looking Form W-2 showing FICA and Medicare withholding and ask a few questions to jog Geithner's memory. 

It also suggests the American Institute of Certified Public Accountants  needs to get some new lobbyists. That so many prominent Democrats can so easily blame their accountants suggests the profession's reputation has suffered badly in Washington.

On a more serious note: The taxation of executives who worked for international organizations was my particular area of expertise for many years.  As Byron York noted, the IMF not only increased Geithner's compensation to reimburse him for the employer's share of the payroll taxes, but that reimbursement was done on a "grossed up" basis.  York also noted that the IMF spent a great deal of time reviewing filing requirements and explaining the gross up calculations.  The distinction between such payments and one's base compensation is also clearly noted on all wage reports.  

It was my experience that executives who receive reimbursements on a grossed up basis are keenly interested if the amount they have received will indeed make them whole.  This usually involves computing a hypothetical tax return, one in which no such payment is received.  An explanation may be in order. The money received from the IMF to cover the employer's share of the FICA tax is subject to both federal and state income tax as well as self employment tax. This means that the employment tax normally due on a base salary of say $150,000 by a US employer can easily become almost double that amount in a high income tax jurisdiction such as New York state and city when paid in the manner used by the IMF.  Because a comprehensive gross up calculation often requires the employee to disclose outside sources of income and deductions in at least general term, they tend to induce some stress and discomfort. Knowledge of an employee's outside income- or lack thereof- can shift relationships in the workplace.  All in all, receiving payments on a grossed up basis are not something that just slips one's mind when preparing an income tax return.   

The non-US employees of international agencies often pay little or no income tax.  They are exempt from US taxation by treaty and most nations do not tax their expatriate citizens on income generated outside the country.  As a result, such international bureaucrats tend to develop a sense of entitlement about taxation rivaling that of Leona Helmsley.  Many years ago I listened to a couple of European employees of the World Bank tell a fellow employee who was US citizens that he was a chump for complying with the US tax laws that require all citizens and resident aliens to declare worldwide income on the US tax return no matter where it was earned. They hadn't paid income taxes in years.  I had to remind my client and friend that given his education and experience, he might find himself having to make his tax returns public someday, so maybe he should listen to my advice, not that of his co-workers and obey the law.
Several months ago, Al Franken blamed his accountant for his failure to pay state income taxes to several jurisdictions. Charles Rangel's accountant also seemed to be unaware of the rules on reporting rental income. Now Treasure Secretary nominee Geithner is blaming his accountant for his failure to pay employment taxes.  While the arcane rules that apply to US citizens employed by international agencies like the IMF may be beyond many practitioners, even a novice at income tax preparation is going to notice there was no normal looking Form W-2 showing FICA and Medicare withholding and ask a few questions to jog Geithner's memory. 

It also suggests the American Institute of Certified Public Accountants  needs to get some new lobbyists. That so many prominent Democrats can so easily blame their accountants suggests the profession's reputation has suffered badly in Washington.

On a more serious note: The taxation of executives who worked for international organizations was my particular area of expertise for many years.  As Byron York noted, the IMF not only increased Geithner's compensation to reimburse him for the employer's share of the payroll taxes, but that reimbursement was done on a "grossed up" basis.  York also noted that the IMF spent a great deal of time reviewing filing requirements and explaining the gross up calculations.  The distinction between such payments and one's base compensation is also clearly noted on all wage reports.  

It was my experience that executives who receive reimbursements on a grossed up basis are keenly interested if the amount they have received will indeed make them whole.  This usually involves computing a hypothetical tax return, one in which no such payment is received.  An explanation may be in order. The money received from the IMF to cover the employer's share of the FICA tax is subject to both federal and state income tax as well as self employment tax. This means that the employment tax normally due on a base salary of say $150,000 by a US employer can easily become almost double that amount in a high income tax jurisdiction such as New York state and city when paid in the manner used by the IMF.  Because a comprehensive gross up calculation often requires the employee to disclose outside sources of income and deductions in at least general term, they tend to induce some stress and discomfort. Knowledge of an employee's outside income- or lack thereof- can shift relationships in the workplace.  All in all, receiving payments on a grossed up basis are not something that just slips one's mind when preparing an income tax return.   

The non-US employees of international agencies often pay little or no income tax.  They are exempt from US taxation by treaty and most nations do not tax their expatriate citizens on income generated outside the country.  As a result, such international bureaucrats tend to develop a sense of entitlement about taxation rivaling that of Leona Helmsley.  Many years ago I listened to a couple of European employees of the World Bank tell a fellow employee who was US citizens that he was a chump for complying with the US tax laws that require all citizens and resident aliens to declare worldwide income on the US tax return no matter where it was earned. They hadn't paid income taxes in years.  I had to remind my client and friend that given his education and experience, he might find himself having to make his tax returns public someday, so maybe he should listen to my advice, not that of his co-workers and obey the law.