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Editorial: IRS action against Buffalo schools shows the need for a comprehensive review

Two questions arise in the wake of the Buffalo School District’s $7.5 million tax settlement with the Internal Revenue Service: Why did the practices that led to it take so long to be uncovered, and what will the School Board do to eliminate the problems that were found?

The principal factor leading to the IRS assessment seems to be the odd nature of several of the district’s financial arrangements. For instance, the IRS rapped the district for $2.5 million over the way it pays 52 operating engineers who maintain boilers and heating and ventilations systems at the schools.

While the engineers are salaried employees, paid around $45,000, they act more as independent contractors who are given lump sums to buy their own equipment and hire custodians to help them. They are allowed to keep what they don’t spend.

This unusual practice dates to the Civil War era and has been justly criticized for its unaccountability. While it incentivizes engineers to control costs, it could also lead some to do so in ways that serve the district poorly.

In any case, the IRS says all the money paid to the building engineers should be treated as wages subject to employment taxes. It helped that the operating engineers were able to show that they deducted taxes from the salaries of their custodians but, still, this practice is out of date. It needs to be changed.

Another example: The recently abolished health insurance rider for cosmetic surgery. The IRS dinged the district for $5 million, saying the benefit counted as income unless it was done for medically necessary reasons.

The rider doesn’t exist anymore for current employees, but remains as a relic for retirees. The district says those retirees will henceforth be on the hook for the tax liability and wants to eliminate it for them, as well. And as well it should.

Perhaps more troubling than the reasons for the unexpected tax bill is that previous audits – including by the district’s independent auditor – never turned up these problems. That would have given the district the opportunity to respond to them proactively and limited the cost to taxpayers who, of course, are the ones footing the bill.

Yet they went unremarked. That’s troubling, as Board Member Lawrence Quinn observed. “Why wasn’t there any advisement to the district?” he asked. And, at least as important: “What other practices are out there that might be deemed income or unreported expense by the IRS?”

These are important questions that the district must quickly resolve. It needs to ensure that its independent auditor is thoroughly examining practices and, indeed, should insist upon a comprehensive review of the district’s financial arrangements and of previous audits.

School districts don’t typically run into problems with the IRS. That Buffalo’s has counts as a big red flag that needs to be treated with the seriousness that suggests.

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