World Bank Gets It Right But Employee Gets It Wrong

Yesterday I discussed how an IMF junior staffer was excused the 20% understatement penalty because her bosses didn’t warn her properly of her liability for SE tax; the case, you’ll remember, was Amy Yu-Wen Chien, T. C. Memo. 2012-277, filed 10/1/12.

But the World Bank does it better, so Judge Halpern isn’t in love with Amy or her decision, in Humberto S. Diaz and Clara D. Diaz, T. C. Memo. 2012-280, filed 10/2/12. Hummer is a Chilean ex-flyboy who transitioned to World Bank from the Chilean Air Force, and to US citizenship from Chilean.

But, unlike IMF, World Bank does a proper tax indoctrination when an employee either is, or becomes, a US citizen. “Because he was a U.S. citizen, the World Bank switched from paying him on a net basis (no additional compensation to cover estimated U.S. tax obligations) to paying him on a gross basis (compensation includes additional amounts to cover estimated U.S. tax obligations).”  T. C. Memo. 2012-280, at p. 3 (footnote omitted).

Hummer’s employment agreements (he signed several during his tenure at World Bank) stated: “The fee [compensation] is based on the understanding that you will assume any tax obligation which may be imposed on your the [sic] World Bank income. United States citizens working in the United States with international organizations are covered for Social Security under the U.S. Social Security Act and are liable for Social Security at the “self-employed” rate.” T. C. Memo. 2012-280, at p. 4.

Moreover, for one of the years at issue “…Mr. Diaz received from the World Bank a form (bank form) containing images of his Form W-2, Wage and Tax Statement, for tax year 2006 (2006 Form W-2). The 2006 Form W-2 identified his employer as the World Bank, and it identified him as the employee. Box 1, labeled ‘Wages, tips, other compensation’, showed $53,230; boxes 2 through 6, labeled, respectively, ‘Federal Income tax withheld’, ‘Social Security wages’, ‘Social Security tax withheld’, ‘Medicare wages and tips’, and ‘Medicare tax withheld’, were blank. The bank form, in space outside the images of the 2006 Form W-2, contained the following instruction:

‘Schedule SE (Self-Employment Tax) must be attached to your Form 1040. U.S. Staff must pay social security and medicare tax at the selfemployment rate on wages for services performed inside the U.S. Please refer to Instructions for Schedule SE, “U.S. Citizens Employed by Foreign Governments or International Organizations,” at www.irs.gov.” T. C. Memo. 2012-280, at p. 5.

And if that wasn’t enough, before Hummer’s tax return was due “… approximately 200 World Bank employees attended a two-hour presentation by the Internal Revenue Service (IRS) concerning World Bank employee tax obligations. The presentation took place in the World Bank’s auditorium, and handouts were provided to attendees. The presentation was simulcast to World Bank employees’ individual desktop computers. At that meeting, the IRS explained that all World Bank employees who are U.S. citizens are required to prepare and submit, with their Federal tax returns, a Schedule SE, Self- Employment Tax, and pay self-employment tax because the World Bank does not withhold the employee’s share and does not pay the employer’s share of Social Security and Medicare taxes.” T. C. Memo. 2012-280, at pp. 5-6.

So after all that, Hummer runs to an AARP volunteer Tax-Aide program, devoted to tax prep for the low-income elderly. Given that Hummer’s pay was $53,320, what by AARP standards is “low income”? Anyway, the AARP volunteers can’t decide if Hummer has to pay SE. That’s easy, because Hummer has carefully cut out of the W-2 he shows the AARP Vols the instructions that say he has to file a 1040-SE and pay the tax. So after a confab, the AARP Vols decide Hummer doesn’t owe SE, and fill out his return accordingly.

Judge Halpern is not amused, even though Hummer shows up with five (count ‘em, five) attorneys to contest the substantial understatement penalty IRS bestows upon him. Hummer of course claims reliance on the AARP Vols, even though he doesn’t know their names, can’t say what expertise they have (if any), and none of them testifies on the trial.

Hummer and IRS did stipulate that the only information necessary to compute Hummer’s taxes accurately was a complete copy of Hummer’s W-2 and the fact that Hummer is a US citizen. Hummer says he gave the AARP Vols the W-2 and told them he was a US citizen.

Now the AARP Vols are trained and IRS certified, but they work mostly with low-income types and are not necessarily experts in the finer points of the taxation of employees of embassies and international organizations.

“Moreover, Mr. Diaz went to some trouble to separate copies of his 2006 Form W-2 from the portion of the bank form including the instructions advising that U.S. citizen employees are required to file a Schedule SE. While we are cognizant of his testimony that he told the volunteer that he worked for the World Bank and paid self-employment tax, we do not dismiss the possibility that he intentionally withheld those instructions from the volunteer.” T. C. Memo. 2012-280, at p. 20.

And Hummer admitted on the trial that he had his doubts about his SE liability, but didn’t have time to check them out. Of course, that didn’t fly, and gave Judge Halpern the hook he needed to distinguish Hummer from Amy Yu-Wen Chien. Amy was an innocent; Hummer was something less.