Federal tax system under scrutiny after discovery of hidden returns

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Posted 8:10AM on Tuesday, January 22, 2002

PITTSBURGH - The Internal Revenue Service uses banks to collect tax payments, citing it as an efficient way to get money into federal coffers quickly, with less hassle for the government. But ever since some 71,000 checks worth $1.2 billion went missing at Mellon Financial's operation in Pittsburgh last year, there has been plenty of hassle: new security measures, an investigation and now a Senate committee's request that the U.S. comptroller general review the security of the entire system. There's been no indication anyone tried to steal anything at Mellon. In this case, the culprits might have simply felt overworked and decided to dump returns into a storage room. Members of the Senate Finance Committee say that created an intolerable situation, spokesman Mike Siegel said. The committee has asked the General Accounting Office, the investigations arm of Congress, to look at what's known as the IRS lockbox system. "We're relying on the quick response of the IRS to make sure there's not a replay of what occurred last year in Pittsburgh," Siegel said. The IRS maintains contracts with four financial firms - Mellon, Bank of America, FirStar and Bank One - to operate lockbox centers in 10 locations across the nation. When taxpayers owe the government money, their returns and check go to one of these bank centers. That way, the check can be credited to the government's accounts quickly, said Ken Carfine, cash management director at Financial Management Service, the Treasury Department's collection and disbursement arm. At the height of tax time in April, Mellon's Pittsburgh operation was processing, on some days, more than 80,000 returns from parts of New York and New England, with checks totaling millions of dollars. To handle the load, some 600 workers processed returns, extracted checks and keypunched information into computers. Temporary workers were hired, with an eye toward hitting FMS' target completion date for the peak filing period, April 29. There was a financial incentive for getting the work done on time, although Mellon officials refused to say how much it amounted to. One said it was "not enough to tempt any employee into compromising his or her job." But something certainly went wrong. It was in May when taxpayers started calling the IRS, wanting to know why their checks hadn't been cashed. The government started tracking down the returns. Two months later, Mellon security officers found boxes in a storage room filled with taxpayer checks and returns from the April peak processing period. It was later estimated that the number of checks missing came to 70,670 and were valued at $1.2 billion - out of 1.6 million checks and returns processed, totaling $14 billion. The government launched an investigation, a grand jury was impaneled, and, at Mellon, the unit which performed the work in Pittsburgh was disbanded. A Mellon official confirmed four people were terminated in connection with the operation but refused to say what they are alleged to have done. "As best we know, they did this because they felt they were behind in their work," Mellon chairman and CEO Martin McGuinn said in the fall. Mellon lost its $7 million contract to process returns in Pittsburgh, although it still maintains a lockbox site in California. The IRS has been working with the affected taxpayers, forgiving the interest charged on late returns and reimbursing taxpayers who paid fees to stop checks they sent to Pittsburgh. Although it was described as an isolated problem, changes were made across the system. IRS Commissioner Charles Rossotti told the Senate Finance Committee in August lockbox banks would be required to improve employee background checks. He also has said officials are looking at tighter controls during peak periods, such as using off-duty police officers to monitor operations. But the committee decided to ask the GAO for a review anyway, concerned that, over the years, auditors have "continually found security weaknesses at a number of lockbox banks." Committee chairman Max Baucus, D-Mont., wants to make sure the IRS has weighed all the pros and cons of using commercial banks to collect taxes. In a letter to the comptroller general last month, he and Sen. Charles Grassley, R-Iowa, asked for a review of the lockbox system, including a specific look at security measures. FMS and the IRS have defended the system, saying the problems in Pittsburgh were isolated and that the lockbox centers have worked efficiently for more than a decade. Spokesman Siegel said the Senate committee agrees this appears to have been an isolated incident. But that doesn't mean a review shouldn't be taken to determine how best to keep it from happening again. "Certainly it's one (situation) that had a tremendous impact," Siegel said, "and could continue to have a tremendous impact."