The City of Billings has been going through an Internal Revenue Service (IRS) audit starting March 1st with completion on April 26th. The audit was triggered by the Firefighter lawsuit payment. Employees should never get a 1099 which they did in this case. The auditor spent the week of March 1st doing the field work for 2008 and 2009. The accountant that prepared the lawsuit payment and I met with the IRS auditor the first day to clarify how the lawsuit payments were paid. The auditor told us this is the first time he has seen a lawsuit like this done correctly. Human Resources and Finance staff met with the auditor on Tuesday morning to answer questions on Payroll issues and fringe benefits. Finance continued to work through issues with the auditor after the field work was completed. The findings were Detective and Firefighter clothing allowances, gift cards or cash equivalents, same day travel meal reimbursement and City vehicles for on-call personnel are taxable benefits to the employee. Another finding was one of the City contractors was determined to be treated more like a City employee so taxes are owed for that person. The treatment of lawsuit payments was also under scrutiny. The City was taxed on one of the lawsuit payments.

Finance worked with Human Resources to resolve these issues by adding the benefits on the employee’s W-2 as wages. Finance developed procedures and tracking forms that will be turned into payroll on a yearly basis. Finance held a meeting to train City staff on these issues and the resolution. The Travel Procedure was updated for same day travel and a new procedure for handling fringe benedfits was adopted by Administrative Order.  All tracking was started April 1st. Finance and Legal are working on the Independent Contractor issue.

Staff worked very closely with the auditor and was able to establish a good relationship. This enabled Finance to minimize the tax liability to the lowest possible dollar amount the IRS auditor could go.

The amount the City owes the IRS for taxes is $54,436.92.

This payment will be spread to many different funds.

Staff recommends approval of the tax payment to the IRS in the amount of $54,436.92.