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The taxman cometh for everyone.
Even the state.
For the first time in memory — perhaps ever — the Internal Revenue Service audited Maryland government. And it turns out Maryland taxpayers owe Uncle Sam at least $5.4 million for tax year 2020.
“This is a new one,” Comptroller Brooke Lierman said at Wednesday’s Board of Public Works meeting where the audit was discussed.
“It might be the first time the state has ever been audited. We looked back 30 years and it had not happened before,” she said.
State and local governments do not have income tax return filing requirements. The IRS notes that those entities are subject to employment and some excise tax filing requirements.
An IRS spokesperson declined to comment on Maryland’s situation, citing federal law on tax return confidentiality. But publicly available data shows that in fiscal 2023, the IRS said conducted 1,645 examinations — the agency’s term for an audit — of tax-exempt organizations, employee retirement plans, government entities and tax-exempt bond returns.
Initially, Maryland was on the hook for roughly $16 million.
Lierman and Lt. Gov. Aruna Miller, sitting as the Board of Public Works, unanimously approved a $5.4 million payment to resolve most of the matter. Treasurer Dereck Davis was absent from Wednesday’s meeting to attend a funeral.
“This [lower payment] is specifically because staff within the Office of the Comptroller and other state agencies worked tirelessly to provide and obtain documentation to the IRS to significantly reduce the amount the state owes,” said Rachel Sessa, deputy comptroller for law and oversight. “And since this is the first examination and assessment of its kind, the IRS agreed to waive penalties.”
Sessa warned that the state may still have to pay interest. The amount of that is not yet known. Sessa said state officials were scheduled to meet with the IRS Wednesday afternoon.
The penalties in tax year 2020 were related to three areas, according to Sessa.
First, nine state agencies failed to properly withhold federal taxes for some employees.
Second, a handful of state police within five agencies made contributions to deferred compensation plans that exceeded limits.
Finally, the state was unable to show the IRS that backup withholding was applied to some vendors.
Sessa said the state is implementing a series of “corrective actions” that include education and training for state agencies. She said the IRS will assist in the training, which will begin “over the next couple of months.”
Lierman said she and other state officials “are working to resolve the underpayment issue with the IRS. It occurred under the previous administration. Gov.Moore, Treasurer Davis, I, Lt. Gov. Miller, I know we’re all committed to transparency in the business of government, and … wanted to make sure that people understand what this is, where it came from, and how we are handling it.”
Board approves more public safety lawsuit settlements
The two-member board also unanimously approved nearly $900,000 to settle three cases involving the Department of Public Safety and Correctional Services. The settlements Wednesday bring the total paid out by the department to $10.5 million for the year, according to Lierman.
Joseph W. Sedtal, deputy secretary of administration for the Department of Public Safety and Correctional Services said the agency is working to improve document retention policies for both paper records and video recordings.
“Obviously, one of the things we’ve seen before is that not having that documentation forces the department to defend a negative,” Sedtal told the board. “We’re trying to combat that through an infrastructure improvement, improving our cameras, improving our policies and retention associated with that, including now looking into ways to potentially audit the ability to retain that information, and ensure that when we say, ‘Hey, we need to hold this for a period of time,’ we’re actually doing it.”
Lierman said such policies are necessary not only to protect the state but also to ensure that incarcerated individuals are not mistreated.
“At the end of the day, it comes down to what evidence we have of what happened,” Lierman said. “We can’t allow our lawyers to be put in a position where they’re asking for video footage or sign-in sheets that have been destroyed or that were never made, because then we have put ourselves in a position where we can’t go to trial and we have to settle because there’s no evidence to prove what we what our side of the story, or to prove … to show what really happened, so that we can then discipline the employees and take appropriate action about against the employees.”
Lierman said the department needed not only to update its policies but to ensure those policies are carried out.
“It’s nice to have good policy, but what matters is actual implementation and follow through,” she said.
