What Mnuchin Should Expect From Senate Vetting: Tax Primer

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By Allyson Versprille

Dec. 12 — President-elect Donald Trump’s pick for Treasury secretary, Steven Mnuchin, is preparing for his turn under the microscope in the Senate Finance Committee’s vetting process.

The committee, which has jurisdiction over big-ticket items like taxes, trade, Medicare and Social Security, distinguishes its vetting process from other committees’ by requiring the last three years of tax returns.

People familiar with the process give some insight into what Mnuchin, a former Goldman Sachs Group Inc. banker and hedge fund founder, should expect.

What’s the Process Like?

In addition to the Treasury nominee’s tax returns, the committee requires the person to provide ethics forms from the Office of Government Ethics and the agency relevant to the nomination; an OGE public financial disclosure report; and a standard committee questionnaire.

The committee won’t begin vetting the nominee until all of the required paperwork is submitted. A Senate Finance Committee spokesman told Bloomberg BNA that the committee hasn’t received Mnuchin’s paperwork.

Mary Burke Baker, government affairs adviser at K&L Gates LLP, said the ethics questionnaire includes information on the nominee’s financial holdings, liabilities and sources of income. The unique Finance Committee questionnaire requires additional information on the person’s finances, published articles and speeches. That data is checked against the tax returns to ensure everything that is expected to appear on the returns is included, said Baker, who served as an IRS detailee to the committee from 2005 through 2010.

Dean Zerbe, national managing director at Alliantgroup LP and former senior tax counsel for the committee from 2001 to 2008, emphasized that the vetting process isn’t supposed to be as thorough as an IRS audit.

The process is meant to make sure the nominee hasn’t been “running away from the sheriff, if you will,” Zerbe said. Confirmed positions that are directly related to tax—the IRS commissioner and the assistant secretary for tax policy—will get the “sharpest pencil,” in reviews of their returns, he said.

Both Baker and Zerbe said many of the errors or omissions the committee staff finds can be easily remedied with an amended return or a letter written by the nominee apologizing for the mistake. “Just because you find something that wasn’t done correctly, it’s certainly not fatal to the nomination,” Baker said, adding that the staff understands how complex the tax code is. Determining whether the mistake is egregious enough to be disqualifying depends on exactly what the error is and how it can be remedied, if at all, she said.

During Timothy Geithner’s vetting process for the Treasury secretary position, it was made public that he hadn’t paid Social Security and Medicare taxes for several years while he worked for the International Monetary Fund. He also employed an immigrant housekeeper who briefly lacked proper work papers. Geithner, who was confirmed on Jan. 26, 2009, just six days after President Barack Obama’s inauguration, righted the wrongs by paying the taxes and filing amended returns. He was secretary until 2013.

Hot-Button Issues?

While mistakes can be corrected, there are several tax issues a nominee should expect to be heavily scrutinized for, including “nanny taxes,” carried interest and foreign bank accounts, insiders told Bloomberg BNA.

Scrutiny of nanny taxes became more prevalent following Zoe Baird’s failed nomination for attorney general under former President Bill Clinton. During the vetting process, it was revealed that Baird hired undocumented workers and failed to pay their Federal Insurance Contributions Act tax contributions. Congress subsequently adopted a law raising the amount that triggers FICA payments to $1,000 a year from $50 a quarter and indexing it to inflation. The law also created a new annual tax filing obligation.

“It is a hot-button tax issue, no question about that,” said Robert Rizzi, a partner and chair of the tax group at Steptoe & Johnson LLP. Rizzi—who has shepherded numerous political appointees through the vetting process, including cabinet and sub-cabinet members in both Democratic and Republican administrations—told Bloomberg BNA he has had clients under consideration for nomination by the Obama administration who were immediately disqualified for failure to pay their nanny taxes.

Carried interest, a tax break for investment fund managers, is another topic that nominees—especially Mnuchin with his hedge fund background—can expect to be questioned on, said James Joseph, a partner and head of the tax group at Arnold & Porter LLP. Carried interest allows managers to pay tax on profits at capital gains rates rather than higher ordinary income tax rates.

Joseph, who volunteers to help campaigns and individual nominees prepare for vetting, said he expects the carried interest question to receive significant attention this cycle, especially since it is a perk Trump has said he would eliminate. “If I’m working for him, we would prepare him for it,” Joseph said of Mnuchin.

In recent years, Arnold & Porter has also begun to ask clients more questions about foreign bank accounts, because “that’s an area that the IRS has identified in the last few years as being one of high noncompliance,” Joseph said. “So finding out, ‘Do you have any foreign bank accounts? Are you a signatory on any foreign bank accounts even in sort of the corporate context?’ because there might be some disclosure requirements” is important, he said.

Baker said a candidate for Treasury secretary should also note that some committee members—Sen. Charles E. Grassley (R-Iowa), for one—have been concerned with “blocker” corporations in the past. Hedge funds can run investments through offshore blockers, with the net effect of reducing the amount of income that would be subject to U.S. taxes.

Other areas that could receive high scrutiny are charitable contributions, transfers to family members and the resulting gift tax bill, the level of income tax paid, mortgage interest deductions, home office deductions, passthrough investments—which Mnuchin may have through his investments in Hollywood movies—and conflicts of interests or compliance issues with the nominee’s foundations, given the attention on the Trump and Clinton foundations during the election, attorneys told Bloomberg BNA.

The last issue may raise some questions. Mnuchin has a family foundation, the Steven and Heather Mnuchin Foundation. Additionally, Politico in a Nov. 30 story said the nominee earned tens of millions of dollars from a 2015 bank sale supported by several nonprofits that had received money from the bank’s foundation, which Mnuchin ran.

Cause of Delays?

During the vetting process, Zerbe said, if there is a delay it is typically the result of a lag in getting paperwork from the nominee and the incoming administration.

“We can’t put a date for a nominee out there on the calendar until we get the paperwork,” he said.

Baker agreed. Once the proper documentation comes in, the committee “works very quickly to try to do the review of the documents to determine if there are any follow-up questions,” she said. There can be a series of written questions sent back and forth based on the paperwork, she said.

After the committee’s bipartisan vetting staff—which typically includes someone from the Joint Committee on Taxation—completes that process, they brief the staff of Finance Committee members. Some members are briefed directly if a situation is serious enough, Baker said. Then the vetting staff interviews the nominee directly and the process culminates in the committee hearing and a vote on the Senate floor if the nominee makes it that far, she said.

Zerbe and Baker said they expect the committee to move quickly on vetting Mnuchin. “The Treasury secretary is a really key position that the administration will want to have in place as soon as possible,” Baker said.

Even with the complicated returns that Mnuchin is expected to have, Zerbe said, proper and thorough vetting of those documents will likely only take a few days.

Same Standard?

Russell W. Sullivan, a partner at McGuireWoods LLP who worked in the Senate for 18 years including 10 years as Finance Committee staff director, said the committee’s vetting standards evolve over time.

Rizzi of Steptoe said for the past eight years scrutiny of tax returns has been heightened. This “sea-change” resulted from issues that arose as part of the vetting for both Geithner, who was confirmed, and former Sen. Tom Daschle (D-S.D.), he said. Daschle withdrew his nomination for Health and Human Services secretary in 2009 because of several tax problems, including failure to pay income taxes on a luxury car and driver. Since then, the Obama White House has pursued its own rigorous in-house vetting of potential nominees, and scrutiny of tax issues by the Senate is also high, Rizzi said.

Sean Spicer, communications director for the Republican National Committee, during a Dec. 12 call with reporters refused to provide details on how Trump vets his nominees and whether the president-elect requires tax returns during that process. “Obviously we have a thorough vet of all nominees and staff members,” he said. “We’re not going to get into the exact procedures and tactics that we use in all of them.”

Rizzi said an interesting question will be whether the same level of scrutiny from the past eight years, by both the president-elect and Congress, will persist. On the Senate side, he said, the indications are that Finance Chairman Orrin G. Hatch (R-Utah) will maintain those high standards.

Sullivan wasn’t as sure. “After this particular campaign where the American people chose a president without any knowledge of his tax returns, I query whether Congress will retain the same standard of review,” he said. “It’s an open question.”

To contact the reporter on this story: Allyson Versprille in Washington at aversprille@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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