How to Avoid a Tom Daschle Tax Problem

In just a couple of hours on Tuesday, two high-level nominees for jobs in the Obama administration took themselves out of the running because of tax problems that they could have avoided.

So what sort of mess is lurking in your return?

Tom Daschle, who was to head the Health and Human Services Department, had income that he didn’t report in a timely fashion.

Nancy Killefer, who was Mr. Obama’s nominee for chief White House performance officer, had a nanny tax problem. (And let’s not forget Treasury Secretary Timothy F. Geithner, who made a number of tax errors but somehow survived.)

The tax code is complicated enough that many, perhaps most returns contain some sort of flub. But this is no excuse for making big mistakes, even if the Internal Revenue Service audits only about 1 percent of all returns (though a higher percentage of those from the wealthy). The system is what it is, and law-abiding citizens are supposed to comply with it.

So if you’re trying to produce a bulletproof set of tax returns, start with a simple suggestion from Anthony J. Guinta, a principal with Homrich & Berg, a wealth management firm in Georgia: Assume you’ll be appointed to a cabinet position someday. Then, inform your accountant, if you have one, of this fact and proceed accordingly.

If your accountant follows through, doing your tax returns each year will involve the same amount of scrutiny that presidential appointees receive. The paradox here, according to J. Mark Joseph of Sentinel Wealth Management in Reston, Va., is that the troubled appointees ultimately got that level of vetting. But all those mistakes raise the question of why the nominees didn’t get it right in the first place.

By adopting a conservative, even paranoid, approach, you will improve your odds of avoiding the tax problems President Obama’s appointees encountered. It might also help you sleep better around tax season. Here’s how that mindset might have helped Obama’s nominees — and could help you, too, in the next 10 weeks (not to mention years).

Don't Forget Your Driver

Mr. Daschle’s mistake in missing income was related to his consulting work and use of a car and driver.

The real problem, according to Allan S. Roth, who runs Wealth Logic, a financial planning firm in Colorado Springs, is that we’re wired to hunt for deductions but not additional taxable income. “We think about how we can have more money in our pockets and not how we can pay more money,” he said.

But there are lots of ways to earn taxable income, and thus increase the amount we have to pay in taxes. “There are different ways that people are compensated, including nonmonetary benefits,” said Dan Shapiro, a tax partner with New York accounting firm Berdon LLP. “There’s deferred compensation or stock options. Any time you receive something of value from somebody, a person or organization that you have an employment or consulting arrangement with, you have to assess it.”

So ask yourself this: What, of any value, did you take in or use last year thanks to someone else, and what might the tax implications be?

CONTINUED : The Case For Getting Help

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