The United States Law Week

INSIGHT: Nanny Tax Scrutiny Less Burdensome Under Trump Administration

March 27, 2019, 8:01 AM

When Bernie Kerik withdrew his nomination for Secretary of the Department of Homeland Security, and subsequently was sentenced to four years in prison, an alleged reason was his failure to pay taxes for his domestic employees—the “Mary Poppins tax,” in the words of one commentator.

That failure to pay taxes does not appear to be the actual reason for his withdrawal, much less for his conviction, and in fact there may have been no nanny in the first place. But the nanny tax issue continues to plague the nomination process.

In more than 15 years of representing presidential appointees of both political parties, a common issue has been concerns over unpaid payroll taxes for domestic service providers, as well as whether such individuals are legally in the United States under our complex immigration laws.

However, the standards for the nomination process are largely applied without any formal guidelines or body of written precedents. Instead, each administration has developed its own ad hoc approach for dealing with these questions as the hundreds of political appointees move through the presidential personnel system.

Automatic Disqualification Under Obama

Under the Obama administration, for example, failure to pay any nanny taxes was almost an automatic disqualification, and nominees were generally not permitted to “cure” past compliance failures by amending returns and paying back taxes.

While many viewed this as an over-reaction to early tax-related scandals involving Tom Daschle and Tim Geithner, many highly qualified potential candidates were sidelined for nanny tax-related reasons, notwithstanding the fact that the compliance rate nationwide has been estimated at less than 20 percent, that is, more than 80 percent of the country disregards this obligation.

In the Trump administration, our experience over the last two years has shown a more flexible approach to nanny tax compliance problems. Beginning with the unsuccessful nomination of Andrew Puzder for Secretary of Labor, the administration has determined that nanny taxes should not be a gating issue. As a result, clients with a history of imperfect tax compliance can often proceed through the process.

More Flexible Approach Under Trump

This flexible approach is balanced by the requirement that prospective appointees, on their White House “Personal Data Statement,” must describe whether they have “ever hired occasional or regular domestic help, such as a housekeeper, nanny, babysitter, gardener, personal assistant, etc. . . . .[and whether] all individuals listed . . . . [were] legally eligible to work in the U.S. at the time that you employed them” and whether all taxes were paid with respect to the individuals.

In some cases, individuals are required to remit taxes, interest, and any penalties to the IRS and thus to “cure” failure to pay past taxes. In other cases, individuals simply commit to complying going forward.

This remedy has a number of practical ramifications, including the difficulty of reconstructing compensation history, or where the individual is no longer part of the household. In such cases, the advice is to estimate the maximum amount of such income that might have been generated, since over reporting in this case carries no adverse consequence to the nominee.

Interestingly, in our experience, there have been no cases in which the IRS has followed up any such submissions of additional tax or amended filings with any type of inquiry, much less audit. This pattern suggests that the IRS regards the failure to comply with less seriousness than the nomination process itself.

Nuanced Attitude Toward Immigration Status

The current attitude toward immigration status is similarly nuanced, notwithstanding the policy of the administration toward undocumented workers. Thus, for example, nominees are sometimes asked to provide the requisite I-9 forms, or the equivalent documentation, in order to support the legal status of domestic workers.

On the other hand, to the degree that the workers can be treated as “independent contractors,” their immigration status is often deemed not to be the responsibility of the nominee.

The development of the nanny tax issue, dating back to the Zöe Baird nomination, reinforces the impression that the importance of this issue has been exaggerated for political purposes. The current state of play in the Trump administration reflects a more pragmatic approach to failures to comply, and a healthy rebalancing of the issues.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Robert Rizzi is a partner in Steptoe & Johnson LLP’s Washington, D.C., and New York offices and co-chairs the firm’s tax practice. He represents prospective political appointees requiring Senate confirmation through the vetting process including Cabinet and sub-Cabinet members, administrators and commissioners of various agencies, and numerous ambassadorial appointees in both Democratic and Republican administrations.

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