December 14, 2011
Completing a year-long review, Internal Revenue Service auditors have concluded that Delaware County owed about $27,000 more in 2007 federal taxes than it paid that year.
County commissioners this week approved a $27,172 payment, made from a county fund typically used to cover insurance deductibles, to cover the unpaid amount without comment.
In 2007, Delaware County under-reported employee wages and taxable benefits under Medicare taxes by about $441,000 and under federal income taxes by about $62,000, the IRS found.
The largest chunk of the unreported wages for Medicare — about $379,000 — is because the Delaware County Auditor’s Office, which is responsible for payroll, incorrectly interpreted who is exempt from paying those taxes.
Most of the remaining unreported benefits — $54,000 that should have been taxed for Medicare and $54,000 under federal income taxes — is due to the fact that the county did not adequately document vehicles and clothing used by county employees, which the IRS deemed to be taxable fringe benefits, rather than non-taxed supplies.
Those fringe benefits include uniforms and vehicles that are taxable benefits because the IRS determined they could be adopted for personal use.
Former Delaware County Commissioner Todd Hanks was auditor in 2007, the time period covered by the IRS audit.
Current Delaware County Auditor George Kaitsa, who succeeded Hanks, said the county has implemented fixes the IRS recommended. He also pointed out the county was not hit with any fines beyond the basic amount owed.
“I think the IRS has recognized the efforts the county has made,” Kaitsa said.
The county paid for the under-reported taxable income, rather than withdrawing from the paychecks of individual employees whose benefits were not reported properly, since it was a result of a systemic problem, Kaitsa said.
“We feel that this is a county responsibility, and that was our position from day one,” Kaitsa said.
The county did not report $379,000 for Medicare taxes in 2007 essentially because of six employees who retired to begin collecting pensions and other benefits, only to be immediately re-hired for the same job.
People who have worked for the same employer since before a cut-off date of March 31, 1986 are not required to pay Medicare taxes.
However, once those six employees retired from their jobs, they no longer qualified for the Medicare exemption, the IRS found. That translates to about $11,200 in unpaid taxes in 2007.
Hypothetically, the IRS could pursue unpaid Delaware County Medicare taxes for years other than 2007 for those six employees, depending on when they retired. However, Kaitsa said the IRS did not indicate it intends to expand its review beyond 2007.
The IRS report provided to the Gazette through a public records request references a separate list identifying those six employees. However, Kaitsa said that list was not a public record. The Gazette has requested payroll records that would identify those employees, but that information was not available at the time of this report.
Another large chunk of the under-reported taxable benefits is due to the county not reporting $54,000 in clothing and vehicles. That translated to $10,000 in underpaid taxes for 2007.
IRS auditors found $36,000 worth of vehicle expenses for five different unidentified county employees that should have been reported for tax purposes. Those five employees — two chiefs in the EMS department, non-law enforcement sheriff’s employees, and one other employee who transported disabled people — were allowed to drive those vehicles to and from work, but were not allowed to drive them for any personal use.
However, those employees did not keep records documenting their mileage that would show they were not driving the vehicles for personal use. So, 100 percent of the value of those vehicles were deemed taxable.
Auditors found $19,000 worth of clothing provided to county employees — such as jackets, gloves, T-shirts and boots — could be adopted for general personal use, and therefore should have been reported as a taxable benefit.
Unreported clothing accounted for $5,200 in unpaid taxes.
A small amount in unpaid taxes — about $726 — is due to an incorrect employee classification for members of the Delaware General Health District board.
The county classified those board members, who were paid $6,800 in 2007, as independent contractors. They should have been termed as county employees for tax purposes, IRS auditors concluded.
Another small amount — about $267 in taxes on $960 in taxable wages — is due to a similar misclassification of an intern in the county’s juvenile court.
The now completed audit of Delaware County is believed to be the first of its kind. The IRS does not comment on why it initiates audits, but Kaitsa has previously said it appears to have been initiated following an anonymous complaint.