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County receives results from IRS audit of 2015 transactions
Posted on 11/15/2017
County receives results from IRS audit of 2015 transactionsWeld County has received the results of an IRS audit that reviewed several thousand county transactions and all payments from 2015. The audit, initiated in April and completed this month, looked at 24 specific areas; reporting findings for only two. Based upon the findings and explanation, the IRS determined an examination of additional years was not warranted.

The 24 areas examined in the audit included: all payroll transactions; all employee benefit packages; employment contracts; all employee allowances, reimbursements, deferred compensation plans, retirement plans, Social Security withholding, Medicare withholding, and W2’s; all payroll deductions; our accountable reimbursement policy; election judge payments; all third-party payments; all 941s; 218 agreements; all W-9s; and all 1099s.

The liabilities found by the audit will require payment to the IRS of $33,680.47: $3,000.47 for taxable commuter mileage and $30,680 from late fees for filing 59 Form 1099s.

In the audit, the IRS determined the commuter mileage is an allowable business expense, but the amount is taxable to the employee. The IRS did not assess a negligent penalty regarding commuter mileage since the county exercised ordinary business care and prudence by relying upon a 1978 Larimer County District Court ruling in People of Colorado District Attorney Eighth Judicial District versus Board of County Commissioners of the County of Larimer, and a 1955 federal court case Emmert and Jasper versus United States. The Larimer County case ruled that CRS Section 30-2-103 allows mileage for county commissioners from residences to county buildings and elsewhere. The Emmert and Jasper versus United States indicated the commuter mileage for judges was not taxable.

The IRS also looked at all accounts-payable payments to third parties. Weld County has over 30,000 vendors in the county’s accounts payable system, and in reviewing all the third-party payments in 2015, the IRS found 59 payments where a 1099 should have been issued but was not. Each 1099 not filed was assessed a $520 late fee. Some of the 59 payments involved taxpayers who were listed as corporations in the county’s system, but were listed by the taxpayers as limited liability companies or partnerships in the IRS system thereby requiring 1099s to be issued. No 20% back-up tax penalty amount was assessed on any 1099.

Many of the 1099s not filed were for payments unique to county governments, such as payments for condemnations and payments made on behalf of welfare clients to third parties. Ordinary business practices of many Colorado county governments are that a 1099 is not issued to any welfare client for public assistance. When a welfare client has an emergency payment for such things as rent (to avoid eviction), dental or eye care not covered by Medicaid, etc., the payment the welfare client is eligible for is paid to the third party on behalf of the welfare client.

Due to having no IRS audit of Colorado counties to provide guidance regarding how to handle the extraordinary circumstance of the issuance of 1099s for emergency payments to welfare recipients when the check was issued to a third party, Weld County believes it had reasonable cause and followed an ordinary prudent business practice used by many Colorado counties in the same situation. The IRS abated some of these 1099 penalties for payments made on behalf of welfare clients to third parties but not all.

Based on the IRS audit, Weld County has received IRS guidance on areas that were not clear prior to the audit. Because of the IRS audit, Weld County Accounting has taken steps to avoid adverse IRS audit findings in the future. Prior to any payment being made to a vendor or third party, the county will require the payee to have a W-9 form on file certifying their IRS filing status to determine if a 1099 form is required to be filed by Weld County. In addition, all commuter mileage paid will be taxable and reported on W-2s.

The IRS audit liability amount will be paid from 2017 budget savings in Finance and Administrative departments and will not require supplemental budget funds to pay the costs.

Weld County Government works to continually improve all our processes and is committed to managing tax payer dollars responsibly. We take the results of the audit seriously and have implemented new policies, based off audit recommendations, to make sure the liabilities addressed in this audit do not occur again.