U.S.:40,000 U.S. Tax Returns Lost at Pa. Facility

greenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Headline: Up to 40,000 U.S. Tax Returns Lost at Pa. Facility ; $800 Million in Payments From Northeast Missing at IRS Processing Unit Operated by Mellon

Source: Washington Post, Thursday, August 30, 2001; Page E01


As many as 40,000 federal tax returns and tax payment checks totaling more than $800 million from New England and upstate New York have been lost or destroyed at a processing center operated by a Pittsburgh bank for the Internal Revenue Service, Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, said yesterday.

It is unclear whether any of the missing documents will be found, so the IRS is advising taxpayers who sent payments to Pittsburgh and whose checks have not cleared to stop payment on them. An IRS spokesman said the agency would pick up bank fees for the stop-payment orders.

The affected taxpayers will have any penalties waived and replacement returns and checks credited as on time, IRS officials said.

The Pittsburgh contractor, Mellon Bank, has not explained what happened, other than to say it does not appear to be cases of identity theft, stolen checks or disclosure of sensitive taxpayer information.

Sources here said it appeared the IRS contract penalized Mellon for unprocessed returns and checks rather than rewarding it for those it did process.

"The system was flawed," one said. "It gave them incentive to stick the payments in a drawer. It was almost cost-effective for Mellon to do that. There was no reward for timely processing."

The situation is reminiscent of an episode at the IRS's own Philadelphia Service Center in the mid-1980s in which overwhelmed IRS workers stuffed returns into the trash because they could not keep up with the workload.

When the current problem was disclosed earlier this year, it was thought to involve about 1,800 returns. But Baucus said yesterday that IRS Commissioner Charles O. Rossotti had "acknowledged that possibly 40,000 or more taxpayers from the Northeast may have had their federal tax returns and tax payments concealed or destroyed" at the Pittsburgh facility.

Baucus said the IRS and the Treasury inspector general for tax administration, who is conducting an investigation, told him that "the number of phone calls regarding uncashed checks has increased to 21,000 and the dollar impact has escalated to $810 million." He added that "it may be six months or more before the scope and magnitude of this problem is fully known."

IRS officials said they have been working for several months to track down missing documents from the Mellon processing center.

Historically, the IRS has directed taxpayers to send their returns and payments to IRS offices around the country where the checks were pulled out and deposited and the returns were processed. As the economy has grown and the IRS has not, the agency has increasingly contracted with banks to receive returns and checks. The banks are supposed to pull the checks out, credit them to the IRS and then forward the returns to the agency for processing.

Mellon has been doing this since 1993 for taxpayers whose returns are processed at the IRS's Andover, Mass., service center.

Mellon's contract has been canceled, and the bank has fired some workers and laid off others. In an e-mail to employees last week, Mellon Chairman Martin G. McGuinn said the bank lost the contract "after we found that a significant number of taxpayer submissions had been hidden, and in some instances, destroyed."

"After an investigation, we promptly terminated several employees," he said. "Tragically, the loss of the IRS contract also meant the shutdown of the Pittsburgh IRS Processing Unit and the displacement of 74 full-time and 32 part-time positions."

About 50 have been reassigned to other jobs, a spokesman said.

Taxpayers affected are from Connecticut, Maine, New Hampshire, Vermont, Massachusetts, Rhode Island and New York, except for New York City and suburban Nassau, Rockland, Suffolk and Westchester counties, who submitted federal tax returns and payments to the Pittsburgh address in April 2001.

Sen. Charles E. Schumer (D-N.Y.) said that thousands of his constituents had been affected by the incident, but hadn't been notified. "Clearly in a tight-budget situation, missing revenue is of great concern to us all," he said in a statement. "But our first priority is to make sure no taxpayer is penalized because of this mismanagement."

The IRS has created a unit to help taxpayers whose payments have been lost. Those whose checks have not cleared can call 800-829-1040, the IRS said.

-- Andre Weltman (aweltman@state.pa.us), August 30, 2001

Moderation questions? read the FAQ