Story Behind $1.3 million IRS Penalty Against Town

by | Feb 7, 2019

By Elizabeth F. McNamara

The town could be facing as much as a $1.3 million penalty from the IRS because of a clerical error pointing to noncompliance with the federal Affordable Care Act (ACA) in 2015 and 2016.

Due to changes in town administration and a lack of documentation, town officials were caught unaware when, in December, the IRS sent a letter saying the town owned a $400,000 penalty for ACA noncompliance in 2016. (November had seen in a new Town Council, prompting both the departure of then-Finance Director Linda Dykeman and the dismissal of then-Town Manager Gayle Corrigan.) It turned out the town had gotten a letter earlier in 2018 indicating a $900,000 penalty for 2015. 

After the December letter was received, officials figured out the penalties stemmed from one employee’s decision in 2015 to seek a subsidy under the ACA while working part-time for the town.

Under the ACA, organizations with more than 50 full-time employees have to offer health insurance to 95 percent of employees. (In 2015, the percentage was 70; in 2016, it went to 95 percent.) The Town of East Greenwich meets that standard. It also offers health coverage for part-time employees but it is prorated, so it’s more costly to the worker. 

According to Acting Town Manager Joe Duarte, the employee took the ACA tax credit thinking she qualified for it. But seeking a subsidy (tax credit) under the ACA raised a red flag to the IRS, Duarte said, prompting the IRS to look at East Greenwich more carefully.

In responding to the IRS’s investigation in 2015, someone from the town “checked off the wrong box,” Duarte said, indicating to the IRS the town did NOT offer health coverage to 95 percent or more of its employees. It was based on that submission that the IRS issued the penalties. 

After getting the letter in December and learning about the earlier letter, Duarte contacted the town’s insurer, which provided a lawyer to work with the town on its response. Dykeman had sent a response to the first letter saying the town was compliant but did not provide documentation. The town has since attempted to provide that documentation. The  paperwork has been completed and submitted to the IRS, Duarte said. Now it’s just a matter of waiting for the IRS to respond. The recent federal government shutdown, however, has slowed the process.

The penalties call to mind another whopping payment the town had to pay recently – a $1.7 million settlement the town paid in 2017 for the then-Fire District’s illegal imposition of impact fees between 2002 and 2013 (read more about that here) – and it comes just as town officials are gearing up for a tough budget year. Although hopeful the IRS will relent, officials said it would be helpful if resolution comes before the budget needs to be approved in June.


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5 Comments

  1. Camille Speca

    Did the illegal imposition of impact fees come before or after the fire department consolidated with the town?

    Reply
  2. Eldredge Rhody-Oh

    Ugh. Two articles here on Jan 29 identify a potential 1.4M shortfall, a supplemental appropriation for 263K, and now this possible 1.3M hit from 2015 actions.

    Call it a cool 3M. Many of these things have been bubbling up. I hope no additional undisclosed / undiscovered liabilities surface.

    Reply
  3. Carter Grey

    Just going to point out that if Republicans were in power and this happened there would be dumpster fires all over town as the angry Left would be in full effect. Note there are no dumpster fires because the Right does not behave like children.

    Reply
    • Sean Washburn

      If we are going to go down this path, the error occurred under the “Right’s” management of the town, the Right’s did have a majority and did appoint Corrigan who hired Dykeman. Any professional that works with the IRS will tell you, when contesting a fine, supporting documentation of your position goes a LONG way to clearing up a clerical error. But feel free to hold your dumpster fire over a clerical error which occurred under Cienki, Todd and Nino’s watch. Let’s just hope calmer heads prevail and the issue is resolved for what it was, a clerical error.

      Reply

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