Audit: Fines now up to $1.4 million for CATA's late payroll taxes

LANSING — Since the Capital Area Transportation Authority announced in March it had paid about $1.2 million in penalties and interest for late payroll taxes, it has received bills from the IRS for another $239,000.

And it's possible there could be more, according to audit reports released Wednesday.

CATA hired Plante Moran in the spring to perform a review of late payroll taxes the transit agency submitted to the state and federal government between 2014 and 2016. CATA at that time had paid about $1.2 million in late fees and penalties because of the delinquent taxes.

Members of CATA's Board of Directors voted to release the completed audit reports to the public Wednesday.

“It gives us a comprehensive view of what the problem was in all areas,” chairman Bob Swanson said, of the report. “Some of the email reviews make it clear the staff knew this wasn’t being done.”

In its June 14 report, Plante Moran concluded that a failure to submit employee payroll taxes and payroll reports between 2014 and 2016 led to the penalties and fees, though it was “clear the funds were available in CATA’s bank account to perform the submissions timely.”

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Plante Moran reviewed more than 2,000 emails from six finance employees that contained keywords such as "payroll," "tax," "IRS," "delinquent," "notice," "fee" and "penalty" in order to “better understand the knowledge of payroll issues within the organization.”

CATA CEO Sandra Draggoo’s emails were not among those included in the Plante Moran review, according to the report.

Some of those email exchanges indicate former Finance Director Erik Lindquist and former Finance Manager Mike Rose were aware of problems with payroll tax submissions as early as December 2014.

The emails attached to the report include:

• An email exchange in December 2014 in which accountant Dana French informs Rose and Lindquist that “to the best of my knowledge, no federal, state, or local electronic tax payments have debited either of our checking accounts since October 23, 2014.” 
  Rose responded within minutes: “That is my project for today – I need to figure out why they aren’t being posted properly.”
  Lindquist responded soon after with, “Hmmmm...so Dana was right to be concerned?? Does that mean the cash hasn’t been taken from the accounts since October??”
• Email exchanges in June 2015, March 2016 and May 2016 detailing notices from the state Unemployment Insurance Agency regarding delinquent quarterly wage and tax reports. 
  Rose is included in all three exchanges, while Lindquist is copied in the June 2015 and March 2016 emails.
• Email exchanges between the National Transit Database and Lindquist in May and June 2015 detail efforts to submit a report to the federal agency before the database closed at the end of June.
• At least three emails between March 15, 2016 and April 19, 2016 from the Social Security Administration to Rose that ask him to correct errors in CATA’s W-2 file.

Lindquist told the State Journal he believed the issues uncovered by French in December 2014 were resolved in January 2015. He said, at that time, CATA had received no late notices from the IRS to his knowledge. Lindquist said he spoke to Draggoo about the issue, and they both believed it was resolved. 

Lindquist said it was also his understanding that the issue mentioned in the June 2015 email had been resolved. He said he had given his resignation to CATA by the time the March 2016 email was sent.

He said the May and June 2015 emails were typical of the back and forth communication with the National Transit Database, but the database report has nothing to do with payroll taxes.

Rose could not immediately be reached for comment.

Draggoo said she was not notified of the issue in December 2014. Otherwise, she said, she would have paid the taxes immediately. 

Instead, she said, the audit report shows the issues in 2014 were not resolved in a timely manner.

"If Erik, as the director of finance, had made these payments, we would not have had penalties and interest assessed against us like we did," Draggoo said in an email.

Of the $1.4 million CATA has paid in late penalties and fees, about $1.3 million went to the federal government and nearly $128,000 went to the state, according to the audit report.

CATA announced the issue in March and was assessed an additional $239,054 in April by the IRS for violations in prior quarters, likely explaining why the total losses increased from the $1.2 million announced in March to the $1.4 million total noted in the June audit.

That total could still increase in the coming months as IRS penalties for past delinquencies continue to roll in, the Plante Moran report said.

“However, since CATA has outsourced its payroll processing to a third-party, there are significantly strengthened assurances that delinquencies will not be incurred for current and future periods,” the report said.

Appeals to the IRS to forgive some of those penalties and interest and a claim to CATA’s insurance company for the losses still are pending, Swanson said.

A comprehensive institutional operational review at CATA is scheduled to begin July 10.

CATA parted ways with its auditing firm, Southfield-based Baker Tilly, following the announcement of the payroll tax issue in March. Board members Wednesday approved the hiring of Plante Moran as the agency's new auditing firm. 

Board members Wednesday also hired KL2 Connects to lead the search for a replacement for Draggoo, who will retire in February. Four board members and four community members were appointed to the CEO search committee.

Contact Beth LeBlanc at (517) 377-1167, eleblanc@gannett.com or on Twitter @LSJBethLeBlanc.