Filing error cost state $544,000 in IRS penalties

Tennessee sues feds, seeking abatement in penalty for inadvertent late filing of payroll taxes
Updated 2:52 p.m. with comment from department spokesperson

Email | Print By E. Thomas Wood

Update, 2:52 p.m.:

Lola Potter, spokesperson for the Department of Finance and Administration, responded this afternoon to an inquiry about whether any department personnel had been held responsible for the error that resulted in the financial penalties.

"No one was disciplined or terminated from their job," Potter said. "This was a matter of human oversight compounded by the IRS system. The unique timing of the filing makes it such that this is unlikely to ever occur again."

As originally filed:

Just when Tennessee's state government is in the midst of major cost-cutting efforts to stave off a budget crisis, lawyers for the state have revealed that the Department of Finance and Administration incurred some $544,000 in penalties from the Internal Revenue Service in 2006.

In the words of a lawsuit pleading for the fines to be set aside, "a mistake was made."

The lawsuit against the federal government, filed yesterday in Nashville's U.S. District Court (copy available at this link), explains how the mistake happened.

On Dec. 29, 2005, a person or persons at F&A was making a routine, if huge, deposit of $26 million in state employee payroll taxes covering the last two weeks of the year. The state government had December 30 as a holiday, but the federal government didn't. Officials at F&A "inadvertently and mistakenly believed that Friday, Dec. 30, 2005 was a federal bank holiday," the complaint states.

Using a phone-in electronic system, an employee entered Jan. 3 (the next business day for the state) as the effective date of the payment. The lawsuit points out that the IRS system accepted that payment date without prompting the filer about the fact that it would be deemed overdue.

Be that as it may, the IRS assessed the penalties against Tennessee a few months later, and the state paid up. Subsequent appeals to have the penalties overturned have failed.

The lawsuit argues that F&A's understanding of the due date "was reasonable, even if mistaken,
under the facts and circumstances." It claims that under the law, therefore, the state was not guilty of the "willful neglect" that would merit a penalty.

The complaint seeks a full refund as well as attorneys' fees. The state has retained William Robert Pope Jr. and Charles W. McElroy of the Nashville firm White & Reasor to argue its case.

Representatives from F&A were not available for comment this morning. This story will be updated with any further information from them.