tax audit

It’s no secret that the Three Forks School District has been struggling for quite some time to fix a bundle of financial issues dating back several years, but administrators finally had started to feel they had a handle on the matters after working doggedly through 2019 to address them all.

A year ago, as reported then by the Belgrade News, district administrators were scrambling to unravel a tangle of problems that included unpaid state, federal, Social Security and Medicare taxes, along with associated fines and penalties; missing revenue data from 2017, which apparently was never entered into the district’s accounting software, thus making it impossible to determine exactly how much money the district had on hand; and incorrect W-2s issued to employees for 2017.

By the end of June 2019, the situation had improved considerably: the books were balanced, so the district knew how much money it had, and district business officials were anticipating a clean state audit for fiscal year 2019.

“We hadn’t had the ‘what are we going to find today’ feeling for two or three months,” said Business Manager Lisa Morgan, who began working for the school district in January 2019 and devoted much of the past year to “forensic detective” work on the district’s finances.

The feeling of relief changed just before Christmas, when a first round of letters from the IRS to district employees arrived with the declaration that they owed more taxes – in one case as much as $30,000 – and that the deadline to pay was only a couple of weeks away. Since then, more letters have been received by current and former employees on a staggered and seemingly random basis. As of Wednesday, a total of 26 employees now have received the notifications.

While employees who haven’t yet received letters have been primed for what to expect, the first to receive them were “very upset and panicking,” Morgan said.

“There was a feeling of ‘here we go again,’ “ agreed Superintendent Jeff Elliott, who – along with Morgan – ended up working all through Christmas break to attempt to resolve the matter. They met with union representatives, and Morgan immediately sent a letter to all district employees, which contained a brief explanation of the wage reporting error that resulted in the IRS believing district employees had earned considerably more money than they actually did, and therefore owed more money in taxes.

The full explanation is as follows:

In September 2018, a former district clerk uploaded an incorrect version of the district’s 2017 wages to the Social Security Administration, nearly eight months late. Instead of reporting 2017 wages, the document contained wage information from January through September 2018. In November, a Social Security representative “backed out” that wage file, and a different, interim clerk for the school district attempted to correct the problem. However, she also erred by uploading a partial file of 2018 wages – this time from January through November – to the 2017 file.

When several employees noticed that their wages were not correctly reported on the Social Security Administration website, the district attempted to resolve the situation with SSA again. The representative who had helped the first time did  not return phone calls.

In March 2019, Morgan contacted the Bozeman office of the Social Security Administration and asked for assistance. An employee advised her to upload the correct wage file, assuring her that it would overwrite the incorrect file. 

“This was not good advice,” Morgan said. “Employees now basically have three wage files uploaded to their records.”

Later in the spring, an official with the regional Denver/Seattle branch of the SSA told Morgan that once a wage file is uploaded to SSA, it becomes the property of the IRS and cannot be deleted. He said the only way to correct exported wages is to complete a correct W-2, and the way to remove over-reported wages was to enter the incorrect wage that had previously been reported and enter “0” for the correct wage.

When Morgan attempted to locate the wage information that had been reported, she could find only the incorrect file that had been uploaded by the interim clerk – and even that wasn’t helpful, because it had been generated into an ASCII file that was not legible to a human reader. Administrators sought the assistance of Black Mountain Software, the Polson-based provider of the district’s accounting software, in hopes of securing a legible wage file, but that proved to be impossible.

On further advice of the regional SSA official, the district in July 2019 ordered a copy of every W-2 form ever reported to the SSA, and Morgan e-mailed a letter to all school employees explaining what happened. By September, the promised copies of W-2s had not arrived, even though the school district’s credit card had been charged the $89 for those records. The W-2s finally arrived on Sept. 23, and the correction process began.

“We only made corrections to the second incorrectly uploaded wage file, as we were informed … that the first incorrect file had been ‘backed out,’” Morgan said. The district believed that to be true because several employees had verified their information on the Social Security Administration website and said that it was correct.

“We manually corrected 158 W-2s in three days,” Morgan said. “We believed the situation to be resolved.”

Meanwhile, the school board hired a tax attorney in August 2019 to help the district navigate its tax penalty problems. It was during a meeting with the attorney and IRS Revenue Officer Roger Madriz that Superintendent Elliot learned the school’s reported wages in 2017 did not match what the IRS had on record for that year, and that the IRS still showed all three wage files that had been uploaded. In December, Morgan delivered all the corrected W-2s to the lawyer’s office in Bozeman to be given to  Madriz, who was in town. 

On Dec. 13, the first of several employees came to the school to notify administrators that they had received letters from the IRS stating  they owed more taxes. Morgan drafted a letter to employees, which included information about what had happened, as well as advice about how they should respond to the agency. The district creed a template for employees to fill out, along with a letter from the school district, to include with their responses. Those who felt they needed to meet with their accountants have been given paid time off to do so, Elliott said.

The district is operating under the assumption that every Three Forks Schools employee eventually will receive a letter, and some are even “sarcastically anticipating” them, Morgan said Wednesday. 

IRS officials have told the district they hope to have the matter resolved by the end of January.