Treasury discovers it owes IRS $35m

By Tina Cassidy, Globe Staff, 4/30/2000

till reeling from a nearly $10 million theft discovered last year in her office, Treasurer Shannon P. O'Brien has unearthed another costly mistake left behind by her predecessor: The Treasury failed to pay $35 million it owed the IRS.

Each year since 1995, Treasury officials miscalculated the amount of payroll taxes the state owed the federal government for employer Medicare contributions.

O'Brien recently brought the information to the attention of the Internal Revenue Service, and has been working with the agency to help the state avoid millions of dollars in fees and penalties, IRS officials confirmed last week.

Although Treasury workers say they do not believe payroll taxes were underpaid prior to 1995, they cannot rule that out, officials said.

Individual state employees will not be affected because the underpayments represented only the employers' share for Medicare.

O'Brien - in office for 16 months - says the new discovery shows the depth of problems she inherited from Republican Treasurer Joseph D. Malone, under whose watch $9.4 million was stolen from the state's Unpaid Check Fund.

The Treasury employee responsible for the miscalculated tax payments was former deputy treasurer Robert Foley, who also allegedly masterminded the looting of the Unpaid Check Fund. While officials say they do not believe there is any connection to the alleged theft, O'Brien said the carelessness is alarming.

''Around every corner, we seem to find another land mine that we have to defuse,'' O'Brien said when asked about the unpaid taxes. ''It's not only stunning, but it's frankly quite embarrassing. ... The fact that the problem could snowball for so many years, that's just outrageous.''

Malone could not be reached for comment.

While there is no evidence that Foley or other workers intentionally withheld the payments, the paperwork shows that sloppy procedures were followed, with incorrect information entered and the wrong IRS forms used.

''We produce volumes of instructions on how to complete forms,'' said IRS state liaison Dan Porter. ''Most employers of any size ... hire someone educated in how to complete these kinds of tax returns.''

The money owed to the IRS will be repaid through the state's cash account. But because O'Brien brought the underpayment to the IRS's attention and is repaying what is owed, the agency is waiving late fees, penalties and interest, which could also have risen to as much $35 million, according to one source.

O'Brien, after an early reluctance to criticize Malone, appears to be growing frustrated with the time consumed addressing problems left behind after his eight-year tenure.

She said she wants the public to know her staff is working long hours to fix them and that it has taken nearly four months to clarify the tax issue.

''There was a profound and deep systemic mismanagement of the single most important duty of the state Treasury,'' O'Brien said. ''Complete neglect of overseeing taxpayers' money coming in and going out.''

Employers are required to pay a tax equal to 1.45 percent of each employee's salary to Medicare, the federal health insurance program for the elderly and disabled. Employees also contribute 1.45 percent, which is withheld from their paychecks.

The IRS recommends that at the end of each calendar year, employers reconcile what they sent to the IRS for each employee with the amount withheld on employees' W-2 forms for Medicare. The amounts should match.

The state failed to reconcile the accounts, and apparently never examined the W-2 forms.

In addition, the state failed to make its payments in a timely way. According to the IRS, employers' payments should be made regularly, after each pay period. However, under Malone, instead of making the payments directly to the IRS, the Treasury sent bills to individual state agencies for what each owed for its employees. The agencies then sent that sum to the Treasury, which sent the money to the IRS, a process that often delayed the payments.

With about 60,000 state employees, errors occurred and there seemed little central accounting of the procedure.

In the wake of the theft from the Unpaid Check Fund, an O'Brien-established task force found that, under Malone, only one staff person was responsible for reconciling dozens of state accounts worth billions of dollars. That employee was either overwhelmed with work or unable to balance the books, O'Brien said.

O'Brien said she is trying to beef up the reconciliation department, and is seeking money to upgrade computers that frequently crash, making it difficult to track money.

''Obviously, the reconciliation of accounts was not a high priority,'' O'Brien said. ''It may well have been part of the problem.''

O'Brien has ordered her staff to scour dozens of other accounts within the office, through which $28 billion flows annually, to see if numbers add up.

Deputy Treasurer for Cash Management Beth Pearce, who discovered the underpayments, also opened a filing cabinet recently and found a manila folder containing a stack of old, apparently uncashed IRS checks to the state Treasury - including one for more than $100,000.

O'Brien said such lax controls allowed several Treasury employees to bilk millions from the Unpaid Check Fund, where state payments to vendors and others land if they go uncashed for a year.

Seven people have been indicted in the case, including three from inside the Treasury: Foley; Scot Butcher, the former director of cash management; and former supervisor John ''Trixie'' Trischitta The others were Malone's campaign fund-raiser and family lawyer Richard C. Arrighi and Boston lawyer Ronald Borino, along with heir finders Martin Robbins and Thomas Ciliberto Jr.

According to the indictments, the stealing began in 1992 when Foley and Trischitta, both of whom oversaw the state's Unpaid Check Fund, funneled $1.6 million from the account to a struggling Waltham condominium project. Investigators claim Arrighi and Borino knew about the money laundering in the form of an investment and helped conceal it.

That was the transaction that touched off years of embezzlement, increasingly elaborate schemes, and an attempt to withdraw $6.5 million in one transaction - an act that so alarmed a BankBoston employee that the teller tipped off the attorney general's office in February 1999.

Trischitta and Foley allegedly received kickbacks from Robbins and Ciliberto, heir finders who allegedly submitted false claims to collect some of those uncashed checks for a portion of the cash.

Heir finders try to match money or abandoned property held in state accounts to their rightful owners, who may be dead, or have a new name or address, among other reasons for being difficult to locate.

The Unpaid Check Fund scandal prompted O'Brien to tighten a range of controls over check cashing, and she has called for monthly account reconciliations, something that did not always take place when Malone occupied the State House office.

This story ran on page A01 of the Boston Globe on 4/30/2000. ) Copyright 2000 Globe Newspaper Company.

http://www.boston.com/dailyglobe2/121/metro/Treasury_discovers_it_owes_IRS_35m+.shtml

-- Martin Thompson (mthom1927@aol.com), April 30, 2000