The Campaign Spot

TurboTax Doesn’t Prompt Users to Pay Self-Employment Taxes? Or Just Geithner’s Copy of the Software?

In today’s confirmation hearing, Treasury Secretary nominee Tim Geithner said he used TurboTax to prepare his returns for the years in question where he failed to pay self-employment taxes — even though he collected reimbursement from his employer, the International Monetary Fund.

Senator Chuck Grassley, R-Iowa, asked, “Did the software prompt you to pay those taxes?”

“Not to my recollection,” Geithner answered.

Do any TurboTax users know otherwise from experience?

UPDATE: A reader responds, “I assure you that Turbotax asks very specifically if you got a 1099 or a W2 from your employer. I know it, you know it, the American people know it!”

Geithner added that the error is his, not the software’s, but again, if the software that he used to prepare his taxes reminded him of this provision of the tax code, and he still didn’t pay, it looks worse, and tougher and tougher to believe that they were “completely unintentional” as he said in his opening statement.

Maybe this isn’t worth voting against his confirmation for, maybe it is. But it increasingly looks like Geithner had several reminders, didn’t pay the taxes, and then collected the reimbursement — and this is aside from deducting the summer-camp expenses as child care, etc. It’s disturbing to see a guy universally regarded as smart and having good judgment repeatedly evading tax laws and making increasingly implausible claims that it was a simple oversight — and perhaps more disturbing to see most lawmakers shrugging their shoulders at it and insisting it’s no big deal.

ANOTHER UPDATE: From another reader who prefers to remain nameless:

I’ve used TurboTax since 2004, so I can’t speak to the prior versions.  I’ve also paid self-employment taxes in all years I’ve used the software (my wife has her own business).  The answer is it depends on how the income is entered.  If it’s something that is obviously subject to SE taxes such as Schedule C business income, TurboTax doesn’t prompt you — it just fills out the Schedule SE and includes the tax on your 1040.  To NOT pay it at that point, you would have to manually go into the Schedule SE form and zero it out — probably overriding several “you better have a good reason for feeling you don’t owe this tax cuz we think you do” warnings along the way.  Not knowing how he entered his IMF income — was it 1099 or something else — it’s hard to say how TurboTax would have handled it, but my experience with the software is that in general it probably would not have prompted — it would have simply included the tax and correspondiing schedules.

But another reader says that based on his experience with the software, the software might well have told Geithner he was putting himself at risk for an audit:

Yes Turbo Tax does ask the user if they are self-employed.  Assuming the answer is yes, then TT leads you through all of the relevant tax and deduction questions.  Even if you happen to click past the tax questions, prior to submitting your form TT summarizes all of your answers and performs a mini-audit**.  If you answered yes to Self-Employment and entered ZERO taxes, you will be prompted that there is a potential IRS Audit issue.

**TT uses this audit feature to up-sell users to purchasing a separate product for audit/accounting purposes.  This audit is touted as to inform the user of potential problems with the return that may raise a red flag with the IRS.

Mr. Geithner by saying “Not to my recollection,” . . . is hoping that plausible deniability will get him through the hearings.

Hmmm: “About 42 million taxpayers file their taxes digitally with TurboTax software maker Intuit Inc., the clear market leader.” About 42 million Americans are going to hear Geithner’s answer and say, “that doesn’t match up with my experience.”

YET ANOTHER UPDATE: The answers from my accountant and TurboTax-using readers continue to flow in:

I’m a CPA in New York and I have many self employed clients. I’ve used several different softwares over the years between working at various firms and working for myself, and I can tell you that it doesn’t matter which software you use, you have to purposefully leave out the self employment tax.  Unless of course he bought the one copy of TurboTax with the glitch for 4 consecutive tax years. What are the odds?

And . . .

I’ve been using TurboTax since I was in B-school, beginning with the 1999 tax year. I’ve been paid as an employee (W-2) and as an independent contractor (1099). In every iteration that I have used, the program at some point during the “Income Interview” has specifically asked me if I had received a 1099 form. TurboTax doesn’t prompt you to pay taxes; it merely calculates your tax liability (or refund) based on the information that you provide.

The only way to avoid a 1099 tax liability is to not enter the 1099 information.

And . . .

I have been using TurboTax since 2001.   I bought it specifically because I had started my own 1-man business and wanted to get my self-employment taxes correct.
You enter your business (or contractor) income, and it calculates what you owe, and it fills in the box for you.   End of story.

I suspect Geithner did not help himself with that answer.


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