Blog note: The article refers to a Kern County grand jury report.
Mistaken
IRS filings by the city of Bakersfield could have cost current and former employees
thousands of dollars in unnecessary taxes.
According to a Kern County grand jury report issued Thursday, the
city mistakenly reported pension and retirement income to the IRS in April
2020, resulting in the federal agency seeking payments on supposedly unreported
income to potentially more than 1,000 current and former employees.
In
one letter included in the report, the IRS told one Bakersfield employee they
owed $16,910 in unpaid taxes.
The
mistake was not made known to the city until March 2021, when several current
and former employees informed the city’s Finance Department. The city quickly
told all current employees of the erroneous filing via email, but impacted
retirees were not informed until July, according to the grand jury, putting
them at risk of unnecessarily paying taxes.
The
grand jury called this delay unsettling.
“It
is further troubling that the infrastructure of a city as large and prosperous
as Bakersfield did not discover the internal source of the error for eight
months,” the grand jury said in its report. “It is inconceivable that in this
age of cybercrime, the City does not have written Policies and Procedures for
dealing with data breaches and possible ransomware.”
The
city declined a request for an interview about the erroneous filings and the
claims presented in the report, but provided a statement to The Californian.
“Informational
security, including personal identifying information of current and former
employees, is a paramount priority for the City,” spokesman Joe Conroy said in
the statement. “We have remained proactive in protecting that information by
implementing security measures, hiring appropriate staff, and contracting with
outside resources. Those efforts are ongoing.”
The
report does not specifically name the number of impacted employees and
retirees, but states that around 1,800 current and former employees needed to
be sent corrected 1099-R forms, which the city files for each person who has
been designated as receiving retirement and pension income.
According
to the report, the city told the grand jury its staff erroneously created a
file that reported pension-distribution information for which no data existed.
That file was then sent to the IRS.
Traditionally,
the California Public Employees’ Retirement System issues 1099 forms for city
employees. In statements to the grand jury, the city said design deficiencies
in its enterprise resource planning system contributed to the error.
After
investigating the causes of the error, the city determined its financial
reporting system could generate 1099-R forms using year-to-date wage
information, reporting it as pension income, according to the grand jury’s
findings.
The
IRS was then sent the erroneous data, which it interpreted to mean city
retirees and employees had earned unreported income. The grand jury’s report
states employees and retirees were receiving IRS notices as late as Sept. 30.
In
addition, slow responses from the IRS and misinformation from our software
provider have exacerbated the problem,” the city told the grand jury. “That
does not take away the fact that employees made a string of errors that
ultimately lead to erroneous information to be reported to the IRS.”
The
report also states the city’s Technology Services department has a staff of 58,
when an ideal number would be around 100. An overhaul of the financial
reporting system has already begun, with $6 million devoted to the project.
However, the city projects more than $20 million may be needed to completely
modernize the system.
The
city retained an attorney to sort through the issues created by the error,
ultimately costing an undisclosed sum. The report states only that the cost was
less than $40,000.
“All
affected personnel — both currently employed and retired — have been notified
of the discrepancy and its resolution,” Conroy said in the statement. “In
addition to the issue being resolved, revised protocols have been put into
place to protect against future issues.”
Among
other recommendations, the grand jury urged the city to create a policy that
mandates action to deal with data breaches, malware, and ransomware issues. In
addition, the grand jury recommended the city hire more Technology Services
staff and provide training to employees of the Finance Department.
The
city has 90 days to respond to the grand jury’s report.
Bakersfield
Californian
By SAM MORGEN
December 2, 2021
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