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Benefits checks bring tax troubles

January 27, 2003|by TARA REILLY

tarar@herald-mail.com

The town of Hancock and several employees might be facing IRS penalties over benefits checks that were issued by the town without taxes deducted, Hancock officials said this week.

The checks are issued monthly to some town employees for uniform allowances and to those who choose to opt out of health and dental insurance coverage.

Councilman Darwin Mills said the uniform allowance is not taxable but the health and dental reimbursements are.

For example, he said, employees who choose not to enroll in the town's health insurance plan receive monthly checks that cover the premiums they would pay if they had the insurance. As of July 1, 2001, the health insurance premium was $251 a month.

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The practice costs the town about $15,000 a year, Mills said.

Town officials are at odds over how long the income has gone untaxed, when the practice was discovered and who discovered it.

Town Manager Larry Logan said five or six employees had been receiving the checks without taxes being deducted and without the income appearing on their W-2 forms, but the practice was recently corrected.

He said the employees' W-2 forms will reflect the income for 2002 and their 2003 checks will show the appropriate taxes deducted.

The town's accounting firm recommended last year that the town send out 1099 tax forms to the employees, but it later said the income should appear on their W-2 forms, Logan said.

The 1099 form is used by taxpayers to report income not taxed by employers.

Logan said he did not know how long the checks were issued without the tax deductions, but the practice started before he became town manager in September.

"We might get a penalty and have to (pay for) the previous years," Logan said.

He said town employees might be facing the same penalties.

Mills said taxes were not being paid on the benefits income for at least six years.

"Somebody's going to be owing something," he said.

"For years, we didn't send out 1099s or tax it," said former Town Manager Lou Close, who retired last summer.

According to town documents, the employees who had been receiving the untaxed income were Police Chief Donald Gossage, police officers Shawn Tasker and Michael Ruppenkamp and town office worker Lisa Fleegle.

Mills provided The Herald-Mail with the documents. He said he has been trying to put an end to the practice since 1997 but his efforts have gone ignored.

He said he contacted Terry Eisenhauer, the town's accountant, on Jan. 13 to inquire about the untaxed income.

Eisenhauer, of Smith Elliott Kearns & Co., sent an e-mail to Logan the same day stating taxes should be withheld on the income and reported on the employees' W-2 forms.

"Bottom line, such payments are considered to be taxable income to the employee and should be included in their wages and reported on the annual W-2," Eisenhauer wrote.

He could not be reached by phone Thursday or Friday.

Gossage said he'll wait to hear from the IRS over whether he'll be penalized.

"It's possible," he said. "I guess that's up to the IRS. If that's the case, I'll file amended returns."

Gossage said he didn't know whether he had been paying taxes on the income on his own.

"I'd have to look at my returns to tell you," Gossage said. "My returns are very, very complicated and complex."

He said he files several different returns a year.

There is some dispute among town officials over who discovered the income was going untaxed and when.

Mayor Daniel A. Murphy and Logan said it was discovered by the town's accounting firm during an audit last year, while Mills said town officials have known for at least six years.

Murphy refuted Mills' claim that he had raised the issue previously.

"I can honestly say I do not remember an issue with not being taxed," Murphy said. "He never raised it that we weren't paying taxes."

Murphy and Mills are running against each other for mayor in Monday's election.

"Our accountants never told us before that it wasn't done right," Murphy said.

Close said the town didn't think it was doing anything wrong because the accountants never said anything about the practice before.

"They've been our accountants since the 1980s, and nothing has ever been mentioned before," Close said.

Mills said he and former councilwoman Gloria Sagle opposed the practice in 1997 and tried to stop it, but they were overruled by the Town Council, which included Murphy.

Former town clerk Juanita Grimm said this week she knew of two contractual employees who had been receiving the untaxed income in the late 1990s. She said Mills and Sagle had questioned her about the checks at that time. Grimm is now Clear Spring's town clerk.

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