Reporting taxable income from secret govt work

May 21, 2013 2:46 PM

I have often wondered how a person deals with taxes if he has a full-time position--say as an academic--but also does work for the govt in work, say CIA or NSA, that is not to be known or discussed with anyone.

In this example, the person is getting a full salary, yearly, and in addition, unbeknownst to his colleagues or anyone else, he has an income based on work he is doing for an agency that does not allow his work to be made public in any way.
If he goes to tax guy, then what he does in secret becomes known, right? Or is that ok.

posted by Postroad to Law & Government (18 answers total)

I imagine that if the work needs to be that secret, that there is a front company the CIA/NSA/ABC has that writes the checks for him. And then he just lists the work as 'consultant' or some such means-anything job title.
posted by ish__ at 2:49 PM on May 21, 2013 [3 favorites]

Depending on just how secret this has to be, he or she might be vaguely paid by the CIA as a "consultant" for "consulting services." Or, if it was extremely important to keep this totally hidden, one imagines that our mysterious individual might be paid by a front company, also for "consulting services" or something else on the vague side.
posted by Tomorrowful at 2:50 PM on May 21, 2013

His (or her) pay would not be classed as like FEDERAL EMPLOYEE: SPY but rather as consulting fees or as pay from a dummy company. That's what he or she would tell the accountant.
posted by DarlingBri at 2:51 PM on May 21, 2013 [2 favorites]

The consulting gig would be useful for things other than taxes. After all, the person may need to explain the time spent on the engagement, and confidential consulting does happen outside of the realm of intelligence (lawyers sometimes need a consulting expert, for example.)
posted by Area Man at 2:57 PM on May 21, 2013

Valerie Plame worked for "Brewster Jennings & Associates", a CIA front company. I suspect that there are all sorts of privately held companies which do their taxes in-house which hire consultants in academia and elsewhere, and, in fact, a consultant for one of those companies may know that their work is classified, and may suspect that a company is a front, but may not know which TLA they're actually working for...
posted by straw at 3:03 PM on May 21, 2013 [2 favorites]

There's lots of people at private companies (i.e. defense contractors, university labs, etc) doing secret government work that they can't discuss in public. In those cases they're just employees of the private entity which holds whatever government contract represents the secret work and they most often have fairly standard titles such as "engineer" or "analyst".
posted by RonButNotStupid at 3:05 PM on May 21, 2013

It is perfectly common for the work itself to be classified but the fact that you are doing the work for an agency to be merely "low profile". In fact, the military-industrial-complex simply accepts the fact that it is way too much trouble to keep basic facts (like the fact that they paid someone to do something) classified and concentrates on keeping secret what they know they can keep secret (what exactly the person's expertise is being used for).

The problem here is that it is hard to come up with a mechanism this would happen outside of speculation because we wouldn't know if such a thing existed if it did exist.
posted by deanc at 3:07 PM on May 21, 2013

Front companies have a long history - the Congressional evacuation bunker (Project Greek Island) was hidden in plain sight under a hotel for 30 years. The maintenance staff were employed by "Forsythe Associates":

Q: How did the government manage to keep the bunker a secret?
[...]Once construction was completed--construction took place from '59 to '62-- the maintenance and operation of the bunker had to also be performed in secrecy. To help maintain this secrecy, Forsythe Associates, a cover company, was created.

The government employees worked down here under the cover of Forsythe Associates. We functioned as a concessionaire to the hotel, providing auto/video support to the hotel as requested by the Greenbrier. In doing that job, we spent about 15 or 20 percent of our time doing A/V work for the hotel and about 80 percent of our time doing the necessary work here in the government facility. All of this was done as Forsythe Associates.

Q: How would you respond to questions about your work?
PFB: When somebody would ask me what I did at the Greenbrier, I would indicate to them that I was the Regional Manager of Forsythe Associates. And they would say, "What in heavens name is Forsythe Associates?" And I would proceed to tell them that we were a management/electronic consulting firm. We had a regional office located here in White Sulphur Springs that we had a contract with the White Sulphur Springs Company, as the Greenbrier was known, and that we performed certain audio/video support services to and for the hotel. And that the personnel that worked for Forsythe worked for me as the Regional Manager. Our "home" office was up in Northern Virginia.

posted by djb at 3:17 PM on May 21, 2013 [5 favorites]

This is not quite the same but I worked briefly as an overseas election observer. Technically I was a volunteer receiving whose expenses were covered. One day I was looking at my bank statement and thought, why did I get a big deposits from Lockheed Martin?! Then I realized that was the deal.
posted by kat518 at 3:18 PM on May 21, 2013

The CIA often establishes front companies. There may also be tax accountants employed by the federal government with the relevant security clearances.
posted by dfriedman at 3:24 PM on May 21, 2013

My husband, a full time physicist in Australia, was doing some work that the USA military was interested in. He was approached by a secret squirrel dude from the embassy who made him an offer that included paying him in cash that would be delivered twice a month in unmarked brown envelopes. The dude made it clear that he should not pay tax on this or declare it, because that would lead to awkward questions. My husband turned it down, partly because he was scared of getting caught by the tax people, so we never found out whether it really would have played out that way.
posted by lollusc at 4:19 PM on May 21, 2013 [3 favorites]

People who work for the CIA have administration who know what they do. These things are taken care of.

My one ex-CIA acquaintance (everyone should have one, I highly recommend it) was a "consulate visa processor" most of the time, per her tax returns, but was also on paper a CIA Analyst for some of those years. There are layers and layers of obfuscation available when necessary.

There is some serious gray-market work out there, and it's either cash under the table or heavily laundered. In any case, should the IRS take notice, there are ways of shutting that down.
posted by Lyn Never at 7:59 PM on May 21, 2013

I wouldn't think in most cases getting a check from the normal payroll would be a problem. It's not like my paychecks say what I did. I get a check from DFAS for my civil service pay, I get another one for my military retirement, I get a disability check... all pretty standard and non-eyebrow-raising to the casual observer.

If you really needed an airtight explanation, like if there was a high likelihood that the person would be actively investigated, then there would be more than just where the paycheck came from. He'd have to have an actual cover story that could be checked out. Like, have contact numbers for a boss who would verify employment when asked, etc.
posted by ctmf at 11:21 PM on May 21, 2013

My husband, a full time physicist in Australia, was doing some work that the USA military was interested in. He was approached by a secret squirrel dude from the embassy who made him an offer that included paying him in cash that would be delivered twice a month in unmarked brown envelopes.

That is the payment model for engaging in espionage and selling secrets to a foreign power.
posted by deanc at 3:47 AM on May 22, 2013 [2 favorites]

This is not quite the same but I worked briefly as an overseas election observer. Technically I was a volunteer receiving whose expenses were covered. One day I was looking at my bank statement and thought, why did I get a big deposits from Lockheed Martin?! Then I realized that was the deal.

This isn't the same thing at all. Lockheed Martin, which to many folks is just known as a defense contractor, is simply a major government contractor with too many contracts (or types of contracts) to count. You were working for Lockheed Martin in what I'm almost certain was a completely above-board position.
posted by OmieWise at 5:00 AM on May 22, 2013

I know someone who did work for the CIA (private sector now) as a handler. He is free to talk about the fact that that was his job but not about what specifically he was involved in.

His normal paychecks/w2's, etc all came from other government agencies (Dept. of Defense for example) depending on what agency he was embedded in at the time.

His "other" paychecks came from a very normal sounding "government consulting" company. According to him, were he ever audited, those records would stand up perfectly to any IRS scrutiny but he doesn't really think he will ever be audited.
posted by magnetsphere at 6:53 AM on May 22, 2013

Here is a list of CIA Front Companies. It would be pretty easy just to say any money would be a consulting fee.

My Mom worked at Mitre at Fort Huachuca. She said she was an office manager.
posted by Ruthless Bunny at 9:20 AM on May 22, 2013

work he is doing for an agency that does not allow his work to be made public in any way

Requiring the products of the person's work to be kept secret is not the same as keeping the fact of their having additional employment secret.

Whatever it says on the tax form their employer gives them at the end of the year is going to be what the IRS sees.
posted by yohko at 2:58 PM on May 22, 2013