City’s IRS Audit ‘Kind of a Wash,’

By Kathleen Sloan

HERALD Reporter

On board for a week, Truth or Consequences Finance/Administration Director Linda Lanham explained the results of the IRS surprise audit that started September 2010 and ended February 2011.

IRS Federal, State & Local Government Special Carl Chavez initially said he would examine only year 2008, but expanded that to 2009.

The bottom line is a $2,158 refund to the city for years 2008 and 2009.

Chavez found five things wrong.

First, he said workers paid as independent contractors should have been paid as city employees – withholding taxes not filed or taken out of their pay amounted to $27,376.

Workers who needed to be reclassified include Victims of Crime Act grant workers, bailiffs, the city’s tourism director, fire chief, DWI programs workers, and elected and appointed officials. The city attorney and golf pro/golf course manager are correctly deemed independent contractors. The city owed $27,376 for this error.

Second, a previous finance director was paid extra under a contract when she should have been paid through payroll. Chavez indicated no plus or minus amount here.

Third, 10 of 14 city vehicles workers are allowed to take home are to be considered “a taxable fringe benefit,” but weren’t, wrote Chavez. He gave no plus or minus amount for the error.

Fourth, city workers who participated in a “deferred health and dental” plan should have been taxed only on income after subtracting what they paid in advance for health and dental. Workers were taxed on their entire income, and the city overpaid $47,254 in tax.

City Manager Juan Fuentes, at the regular city commission meeting held Tuesday, April 10, said this money has been returned to city workers.

Fifth, the city didn’t issue 10-99’s to various vendors and, therefore, did not withhold 28 percent “backup withholding tax,” as required by the IRS, wrote Chavez. The city owed $14,419 for this error.

The IRS penalties for the mistakes totaled $3,300.

The end balance after subtracting and adding the under and over payments comes to a tax return of $2,158 to the city.

Lanham called this “kind of a wash.”

Lanham said the city was given the option of voluntarily correcting their independent contractors/city employees classification errors for 2010, thus reducing penalties. She and Fuentes said this will come before the city commission at a future date.


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