Why Daschle’s tax sins are worse than Geithner’s.

Update, Feb. 3, 2009: Tom Daschle withdrew his nomination for HHS secretary Tuesday, saying he didn’t want to be a distraction for the new administration. His announcement came hours after Nancy Killefer, Obama’s nominee for White House “performance czar,” pulled out over her own tax troubles.

Tom Daschle

Last week Tom Daschle became the second nominee to the Obama Cabinet to jeopardize his confirmation over his income taxes. The question is whether he will become the first to suffer for it.

Daschle, Obama’s choice to head the Department of Health and Human Services and become the administration’s health czar, had failed to pay $128,000 in taxes for a car service he’d been using since 2005, plus on about $80,000 of consulting income. That was two weeks after Tim Geithner, now treasury secretary, announced that he’d failed to pay $25,000 in payroll taxes while working at the International Monetary Fund.

On the surface, Daschle’s screw-up looks a lot like Geithner’s. Both men underestimated how much they owed—or simply underpaid. Both situations involve gray areas or confusing aspects of the elaborate U.S. tax code. And, of course, both blamed their accountants.

But there are some key differences that may influence how the Senate finance committee views Daschle’s case. When the news about Geithner’s errors broke, Democrats on the committee rallied around him. Chairman Max Baucus said it was a “given” that he would be confirmed, and even some Republicans supported him out of the gate. The committee has been slower to defend Daschle. Baucus said in a statement Monday that “all issues raised will be considered carefully and thoroughly by the Finance Committee in the coming days.” Translation: We’re gonna let Daschle sweat this one out. They have yet to set a date for the confirmation hearing.

One big difference is the nature of the oversights. Geithner’s mistake was procedural—he reported income incorrectly—whereas Daschle’s was substantive—he failed to report some income at all. At issue in Geithner’s case is the odd filing system of the International Monetary Fund, which, because it’s an international organization, isn’t required to pay payroll taxes. Payroll taxes are normally split evenly between employer and employee. Instead, the IMF gives its employees an additional payment equal to their half of the payroll tax and asks the employees to file those taxes themselves. Geithner didn’t.

When the IRS audited him in 2006 and pointed out the error, Geithner paid the taxes he owed for 2003 and 2004. But he failed to pay the same taxes for 2001 and 2002. In his confirmation hearings, Geithner wouldn’t say why. But the reason is pretty clear: He didn’t have to. There’s typically a three-year statute of limitations on tax audits. If the IRS doesn’t catch you before three years have passed, you’re off the hook. Unfortunately for Geithner, public officials are held to a higher standard. So in November 2008, he went and paid the back taxes even though he didn’t have to. (Fun fact: The IRS can’t accept money it isn’t owed—and after three years, you legally don’t owe the money anymore. In all likelihood, the agency will return the unowed back taxes to Geithner.)

Daschle, by contrast, omitted income. Sure, there’s a gray area around what constitutes a gift or a fringe benefit (on which you don’t have to pay taxes) and a business transaction (on which you do). But the car service provided by InterMedia Advisors, for which Daschle sat on the board and earned more than $2 million in consulting fees, doesn’t seem particularly ambiguous. “Under Section 132 of the Internal Revenue Code, the value of transportation services provided for personal use must be included in income,” the finance committee reported last Friday. “Senator Daschle estimated that he used the car and driver 80 percent for personal use and 20 percent for business.”

Even less gray is the $80,000 of consulting income Daschle simply failed to report. He’s got a decent excuse—InterMedia screwed up its calculations and didn’t include that income in its annual statement. But the disparity should have been clear in Daschle’s books. (Apparently the IRS agrees: While the service didn’t penalize Geithner, it did slap Daschle with fines.)

But the trickiest question for Daschle is one of judgment. If he had been using the car since 2005, why did it only occur to him to report it in 2008? If he makes it to a committee hearing, that will be the question of the day. Politicians tend to get religion as confirmation hearings approach. Did that happen with Daschle?

There’s little reason to doubt Daschle when he says his mistakes were “unintentional.” Harry Reid is probably right when he declares, via a spokesman, that “Senator Daschle will be confirmed as secretary of health and human services.” And Obama said Monday that he “absolutely” backs Daschle. But what ultimately matters is less the mistakes themselves than how far the nominee went to prevent them, when he discovered them, and how quickly he acted upon his discovery. If Daschle can answer those questions to the committee’s satisfaction, he’s in the clear.

Watch White House press secretary Robert Gibbs’ briefing on Daschle: