The taxman has come to Schenectady.
The IRS is auditing the city’s books, focusing on the paychecks from which the city doesn’t withhold taxes.
So far, the city has run afoul of one rule that governs how workers receive an annual $125 allowance for new workboots. The city hasn’t been taxing that money, but it also hasn’t been collecting receipts that show how the money was used, Finance Commissioner Deborah DeGenova said.
“Technically, any amount that is not receipted is taxable,” she said.
The IRS auditor has not issued a final determination on the issue, but DeGenova said the tenor of the questions led her to believe he would report that the city was in the wrong. Given that, she’s already calculated the possible penalty; Schenectady would have to pay a fine of about $5,000 to $7,000.
“The city will have to pay a penalty and the applicable taxes that would have been withheld,” she said, adding that no employee would have to pay.
“It would be something the city had done inappropriately,” she said.
She also stressed the city would still give out the annual boot allowance. The question is simply how to do so legally, and there are several options, DeGenova said. She plans to meet with the employee unions to discuss the options once the auditor has issued a final report. The union contracts guarantee the boot allowance for certain jobs.
“The boot allowance is still going to be something the city provides to its employees,” she said.
The city could ask all employees to bring in a receipt each year, but any remaining part of the $125 would have to be taxed. That could lead to clerks calculating the remainder in each worker’s allowance, issuing a nontaxable reimbursement for the actual cost of the boots and then putting the last few dollars of the allowance into the worker’s next paycheck, where taxes would be withheld.
“That is incredibly messy,” DeGenova said. “The other choice is we just pay them through payroll. The city is looking at the various ways, and we’ll talk to the unions first. There’s no decision yet.”
The audit will likely be completed by mid-February, she added.
The auditor is also focusing on the W-9 system, in which the city pays independent contractors, DeGenova said.
City officials collect taxpayer identification numbers through IRS form W-9, pay the contractors without withholding taxes and then report the amount to the IRS if it’s more than $600.
“They’re just checking,” DeGenova said, but added that she has gotten some questions about the process.
“I believe there may be some indications [of mistakes] coming out of the W-9 process,” she said. “We’ll make whatever adjustments are needed and learn from it.”
She added that she doubted the city would have to pay more than $1,000 in penalties for any W-9 process errors. But no errors have been reported yet.
“Everything is preliminary,” she said. “But he’s the examiner. It’s his job to find things, and it’s our job to learn from him.”