“It’s about the worst it can get,” was how Porter County Attorney Gwenn Rinkenberger put it.

The Internal Revenue Service has decided to take a punitive stance against the way the county handled some of its employee contracts in a tax audit for the years 2007, 2008, and 2009.

The maximum amount the county could owe is $175,000, which is figured through penalties and interest rates.

The agency sent the county a preliminary audit last month, saying the county was wrong in how they issued tax forms for independent contractors, board and commission members, fringe benefits, and backup withholdings.

Saying that they were operating in “good faith,” county officials contend that penalties would not be necessary since they were already willing to make the changes suggested by the IRS and no intentional fraud had been committed.

The county held a conference call on Friday, Sept. 17, asking an IRS agent to see if the penalties could be waived.

In a follow-up conference call on Monday, the IRS came up with an “accuracy” penalty, which fines the figures in question at 20 percent, and a “failure to deposit” penalty, which factors in an additional 10 percent. That means together, the county will owe the IRS a 30 percent penalty on any tax they contend the county owes.

Rinkenberger’s comment to the Chesterton Tribune was that it was too severe.

“We’re going to be denying that we owe the taxes and we will be appealing their audit,” she said.

The county will next ask the IRS to provide a revised preliminary report showing the penalties. Rinkenberger said she knows the county will file a formal disagreement with the report which is due on Nov. 1, but says they may be able to clear up a few penalties in the meantime.

A final audit will be issued sometime after Nov. 1. The county will then have 30 days to register objections with the Local Government division of the IRS.

The IRS is also charging interest on the taxes in question. For taxes from 2007, the agency is issuing a 14 percent interest rate, eight percent for 2008, and 4.4 percent for 2009.

In an example, if the county paid an employee in 2007 for $10,000, the county would have to pay that back plus 30 percent which comes to S13,000 and finally about $18,500 when you tack on the interest rate.

“The employees paid it. Now they want us to pay it,” she said. “I’m really disappointed with the position they are taking.”

Rinkenberger described the actions as aggressive and punitive, believing the IRS wants to deliberately take money from local governments including municipalities. “It’s not right,” she said.

This is the first time she can remember the IRS auditing the county, and has never heard the reprimands until now.

The fines would have reached $400,000 if Porter County auditor James Kopp did not send out W-9 and 4669 Forms to the vendors from 2007. Not every vendor has responded, however, and the county is currently facing a fine of $41,000 from that section of the audit.

“We’re making progress I guess,” said Kopp.

The county is now using W-2s instead of 1099 Forms for its contractual workers and county board members. Rinkenberger said she disagrees with the IRS’s premise that the contractual workers should be treated as employees.

The county will try to help out employees who are caught in the middle if the appeal is unsuccessful, but Rinkenberger figures that too could be a costly process.

The next step will be to ask the IRS for a revised audit taking out the amounts that have already been corrected.

Posted 9/29/2010