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Carter introduces Geithner Penalty Waiver Act

This December, members of Congress find themselves grappling with what to do about expiring tax provisions (federal estate tax) as well as what to do about new taxes ("war" tax and health care surtax). In the midst of it all, Rep. John Carter (R-TX) has his own idea for consideration: the Geithner Penalty Waiver Act.

Rep. Carter's bill is officially known as H.R.4172 with the Title: To provide the same penalty rate for taxpayers who voluntarily disclose unreported income from offshore accounts as was afforded Timothy Geithner with respect to his failure to pay self-employment taxes with respect to his compensation from the International Monetary Fund. The unofficial title is the Geithner Penalty Waiver Act.

According to Rep. Carter, taxpayers who applied for the U.S. Treasury Department's amnesty plan for foreign income should pay the same penalty rate as that paid by the Treasury Secretary on his International Monetary Fund (IMF) back taxes. That penalty rate, in case you missed it, was zero.

Prior to his confirmation as Treasury Secretary, Timothy Geithner worked for the International Monetary Fund from 2001-2004, where he was classified as an independent contractor. Geithner failed to pay SE taxes (self-employment taxes, which are basically the FICA equivalent for an independent contractor or self-employed person) during that time.

At an IRS audit in 2006, Geithner repaid his taxes for 2003 and 2004 but did not pay the tax for 2001 and 2002 until 2008. That amount due wasn't even discovered by IRS: it was discovered by Obama's transition team during Geithner's vetting for consideration as Treasurer.

Despite the significant error in initially failing to pay his tax and the passage of a substantial period of time, Geithner paid back taxes and interest -- but reportedly no penalty.

Carter argues that Geithner's actions have created precedent, claiming, "[t]his bill seeks to codify what is now established by the law of precedent. The Geithner case has established a legal precedent for the determination of penalties by the IRS, and that precedent can be cited in all federal tax courts. The penalty is now set at zero."

He went on to say, "Taxpayers who willfully attempt to evade paying their fair taxes should pay a penalty, or our tax code becomes unenforceable. This bill is not to reward tax evaders, but to defend the Rule of Law itself. If we as a nation choose not to enforce the law against the politically privileged, then we cannot enforce the law against others without undermining respect for the law itself."

To support his argument, Carter invoked the Equal Protection Clause of the 14th Amendment to the U.S. Constitution which mandates equal penalties for similar offenses.

Notwithstanding the fact that the IRS doesn't have an obligation to follow precedent in all instances (meaning, generally, that they take a "facts and circumstances" approach -- this is why Private Letter Rulings clearly state that the decision is applicable only to the taxpayer), Rep. Carter does have a point. The laws should be enforced in a predictable and consistent manner. Spotty enforcement of penalties, especially for those officials in government, sends the wrong message to taxpayers.

H.R.4172 was introduced in the House on December 2, 2009 and has been referred to the House Committee on Ways and Means. The bill has two co-sponsors: Rep. Michael C. Burgess (R-TX) and Rep. Lynn A. Westmoreland (R-GA). Despite the support of Burgess and Westmoreland, it won't pass Congress. But then, that's not really the point. Rep. Carter is trying to send a message to his colleagues in Congress.

It wouldn't be the first such "message" legislation crafted by Rep. Carter. In January of this year, he submitted H.R. 735, with the Title: To amend the Internal Revenue Code of 1986 to provide that penalties and interest will not be imposed on individuals who are citizens of the United States. The bill, alternately known as the Rangel Bill, called for an amendment to exempt US citizens from the payment of penalty and interest on their tax return so long as they wrote "Rangel Rule" on the top of the first page of the return.

This was a direct response to the failure of Rep. Charles Rangel (D-NY) to properly report income and pay the applicable tax on his income tax return. Rep. Rangel also happens to be the Chair of the House Ways and Means Committee -- the very committee in charge of writing our tax laws.

The Rangel bill, which Rep. Carter eventually petitioned to remove from Committee, was co-sponsored by familiar names, Rep. Michael Burgess (R-TX) and Rep. Lynn Westmoreland (R-GA); Rep. Steve King (R-IA) also signed on.

Rep. Carter may not push these bills through Congress but he has definitely brought these matters to the forefront. The real question is: what happens next?

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