There is no reliable record of how many promotions, elections, appointments and careers have been delayed or abandoned because a high-profile person failed to comply with some obvious or obscure tax-law provision.

Tax advisors often point to American lawyer, Zoe Baird, president of Markle Foundation, Kimba Wood, two of President Clinton’s choices to serve as attorney general of the United States, both of whom withdrew their names for consideration after revelations that they failed to pay the so-called nanny tax.

Nanny Tax

The nanny tax comes into play when you pay the same adult worker more than $1,700 per year (in 2011), averaging $141.67 per month or $32.70 per week. So if your clients pay a maid or a gardener or a babysitter $35 per week, they owe the nanny tax. Actually, the tax your clients owe is the Social Security and Medicare taxes on the amounts they pay for the domestic services. They also may owe federal and state unemployment tax if your clients pay a household employee $1,000 or more in any calendar quarter.

There are some situations in which domestic services are not subject to the nanny tax:

• If the domestic worker is employed by an agency or third-party, who controls what work is done and how it is performed, payroll taxes are the agency’s responsibility.
• If your client’s babysitter provides care in their own home, the sitter is generally not considered as your client’s employee.
• If your client’s child is cared for by their spouse or their own under-21 year-old child, your client will be exempt from the nanny tax.
• The nanny tax does not apply to services provided by someone under age 18, unless domestic service is their principal occupation. Students are not considered to have domestic service as their principal occupation.
• Payments to your client’s parent who cares for their child is also exempt, unless the child is under 18 or has a physical or mental condition that requires the personal care of an adult and your client is a single parent or your client’s spouse is physically unable to care for their child.

The nanny tax is relatively easy to deal with; but it is not the only area where high profile individuals run afoul of the law.

Tim Geithner

U.S. Treasury Secretary Timothy Geithner failed to pay Social Security and Medicare taxes for several years, while he worked for the International Monetary Fund (IMF). As an American citizen working for the International Monetary Fund (IMF), Geithner was technically considered self-employed and was required to pay Social Security and Medicare taxes.

The IMF and World Bank reimburse employees, including U.S. citizens, for their U.S. income taxes. However, they do not make contributions toward Social Security and Medicare taxes, which individuals are expected to pay on their own.

In 2006, the Internal Revenue Service (IRS) audited Geithner's 2003 and 2004 tax returns, which he had prepared himself, and assessed more than $17,000 of taxes and interest. While being vetted for his nomination to become Secretary of the Treasury, Geithner paid an additional $26,000 relating to the same issue for 2001 and 2002.

Tom Daschle

Although Geithner was ultimately confirmed as Secretary of the Treasury, former Senator Thomas Daschle (D-SD) did not fare as well in his bid to become Secretary of Health and Human Services.

Daschle had been a paid consultant and advisor to InterMedia Partners, during which time he received a limousine and chauffeur. Daschle failed to report the value as income, apparently considering it a gift from a friend. While attempting to remedy the situation in preparation for confirmation hearings, Daschle’s accountant discovered unreported consulting income and charitable deductions to nonqualified organizations.

Although Daschle paid over $140,000 of taxes and interest, he still withdrew his name from consideration for the cabinet position.

These examples garner a lot of press coverage because they occur in the political spotlight. No one knows how many up-and-comers in the private sector have been waylaid by similar oversights. Companies concerned about their public image sometimes take drastic steps to avoid tarnish. High-profile law firms and large public-accounting firms occasionally require their partners to confirm annually, in writing, that they have filed and paid all of their required taxes.

The Wall Street Journal Test

If you serve as a tax advisor to a high-profile individual or even to individuals who — sometime in the future — may become high-profile, it behooves you to be particularly vigilant. When discussing potentially controversial tax positions with clients including positions in which you expect the client to prevail, that they apply the “The Wall Street Journal test.”

The test works like this:

Imagine the entire tax situation were spelled out in detail on the front page of The Wall Street Journal. How would your client react? How would your client’s friends and family react? How would employers, associates and customers react? If your client is unwilling to endure the results of their tax planning being placed in the public spotlight, maybe they should pass on the tax saving opportunity, even if you both think you can beat the IRS in court.

Conclusion

On the other hand, some clients have the stamina to endure high-profile tax controversies. Here is how one client once described the role they wanted their tax advisor to play:

Imagine we are walking along the edge of a very steep cliff. The footing is treacherous. If you miss a step, you commit tax evasion, fall off the edge and go to jail. My plan is to walk as close to the face of the cliff as I can without going over. As my tax advisor, I want you [to] always stand close enough to me so that, if I lose my footing, you can reach out and grab me before I go over the precipice.

Let’s face it; all clients are not the same. They do not have the same tolerance for risk: physical risk, financial risk or tax risk. The questions you should ask yourself are:

• How well do you know the tax-risk tolerance of each of your clients? and
• What steps are you taking to ensure you know each client well enough to help them manage that risk within their personal level of tolerance?