LORAIN — A U.S. Internal Revenue Service audit has determined that the city of Lorain failed to send out proper tax forms to some vendors for the 2011 tax year, a mistake that could potentially cost the city nearly $210,000 in fines and penalties.
According to documents released Monday in response to a public records request by The Chronicle-Telegram, the damage could have been far worse.
The original figures provided by the IRS put the city’s potential liability at $775,631.08, an amount Lorain City Auditor Ron Mantini said he and other officials have been systematically working to reduce before another meeting with the IRS at the end of the month.
As it stands, Lorain officials estimate the city is still on the hook for $209,944.24 and they’re hoping that number will drop.
“We’d like to get it down to nothing, but that’s probably not going to happen,” Mantini said.
The city learned of the problem after the IRS launched a compliance audit in August and discovered that the city hadn’t been sending 1099 forms — which detail how much a particular vendor received in a given year — to many of the city’s vendors.
Chief Deputy Auditor Anita Harper said most of the vendors who didn’t get the proper paperwork were those who have been doing business with the city for more than a decade and whose tax information hadn’t been fully input into a newer accounting program. That lack of information meant that the proper forms weren’t going out.
“Is it something we should have caught? Yes,” Mantini said.
It’s a problem that dates back years, although Mantini doesn’t believe the IRS will go back and force the city to bring itself in compliance for additional years.
Originally, the IRS provided a list of 139 vendors that hadn’t received the forms from the auditor’s office, but Harper said the figure was later determined to be 54.
For each form that wasn’t sent out, the city can be fined $200 and forced to pay a penalty equal to 28 percent of the amount of money that should have been reflected on the 1099 form.
Harper and Mantini said not all of the vendors who didn’t get a 1099 form were actually entitled to receive one under federal rules. Those that were are being contacted to determine if they paid taxes on the funds that they received from the city and if they did the city won’t be penalized or fined for the unsent form.
Those efforts, Harper said, have resulted in the IRS’s original penalty of $505,767.07 for 1099 forms the auditor’s office didn’t send dropping to $69,919.51.
Another 95 of the 1099 forms were supposed to have been sent to law firms by Lorain Municipal Clerk of Courts Lori Maiorana’s office but didn’t go out. The work to correct that problem hasn’t been as successful as the auditor’s efforts, according to the documents.
The original penalties and fines associated with the clerk’s office have dropped from $269,864.01 to $140,024.73.
Lorain Municipal Court Judge Mark Mihok said he and fellow Judge Thomas Elwell have been calling the law firms to ask the companies to complete the necessary forms and send them back.
Unlike with Mantini’s office, which is typically paying for services rendered or products sold to the city, Maiorana’s office is serving as a pass-through agency for parties involved in cases to pay attorneys and their clients, effectively serving as a way station for the money.
Mihok said the money is typically sent to the law firms, who take their cut, if they’re owed anything, before sending the money along to its final destination.
The unsent 1099 forms weren’t the only problem discovered by the IRS, Mantini said. He said the city also was informed that it had been paying some benefits, such as uniform and tool allowances, to workers in the wrong way. Rather than including that money in employees’ checks where it could be taxed, the city had been cutting separate checks, Mantini said.
He said the city will have to issue corrected W-2 forms, which list an employee’s taxable income, for 2011 to as many as 300 city workers, including police officers and firefighters, to bring itself into compliance with federal rules.
If an employee itemized their tax returns, Mantini said, the worker will likely have to file an amended 2011 return.
That could mean that employees who hired someone else to do their taxes might have to pay to have their tax returns fixed. The employees, not the city, would be responsible for paying any costs associated with resubmitting their tax returns, Mantini said.
He said the city intends to pay benefits properly going forward, but this year complying will mean manually inputting the data into employees’ W-2 forms so they are correct when workers go to file their 2013 taxes next year.
Mantini said the city has been doing everything it can to correct all of the problems uncovered by the IRS and to minimize the impact on the city’s bottom line.
“It’s been a lot of work, and it’s going to continue to be a lot of work,” he said.