Agency reveals debt to IRS

Nonprofit that aids poor owes $850,000 in back taxes, fines

CEO `made a bad choice'

January 19, 2001|By Scott Calvert | Scott Calvert,SUN STAFF

A government-funded nonprofit agency that helps Anne Arundel County's poor owes the Internal Revenue Service $850,000 in back taxes and penalties, the president of its board of directors said yesterday.

For more than a year, the Anne Arundel County Economic Opportunity Committee Inc. did not send the IRS the money it withheld from employees' paychecks for income taxes, Sylvia Jennings said after being contacted by The Sun.

There is no sign of embezzlement, she stressed. Rather, $600,000 intended for federal taxes apparently was used to cover overspending in Head Start, a federal program for 3- and 4-year-olds that the agency administers in Anne Arundel. The IRS has also levied a $250,000 penalty.

"The first thing you think is, who took the money?" said Jennings, executive director of the Owensville Primary Care Medical Center in southern Anne Arundel. "It is plain and simply a general weakness in the financial oversight of the agency that resulted in this."

She said Chief Executive Officer Edith M. Knight ran low on cash and "made a bad choice" not to pay taxes. The agency's finances were in such disarray that Jennings once described it at a board meeting as "floating in never-never land." She accused the staff of keeping board members in the dark for months.

Knight, who has run the agency since 1994, said she was told to refer all questions to Jennings.

New financial controls have been instituted since the agency's external auditor uncovered the problem last fall, and all taxes for 2000 have been paid, Jennings said. She and auditor Thad Toal, who has been brought in to run the agency's finances on a day-to-day basis, will offer to pay the IRS "perhaps half" the $600,000 - but over several years. She hopes the penalty will be forgiven altogether.

A meeting is scheduled next month at the IRS office in Baltimore. IRS spokesman Sam Serio said federal law prohibits the agency from commenting on such cases.

"The programs have not suffered from this at all, and will not, unless IRS should not agree with our plan," said Jennings. "God knows what would happen then."

She said one possibility, however remote, is that the nonprofit agency, with an annual budget of about $3.6 million and 120 employees, would be forced to disband. Then, programs such as Head Start might be put under the control of the county school board or other agencies.

Word of the agency's financial woes have alarmed local elected officials. County Executive Janet S. Owens was briefed by Jennings a month ago and said she is "very concerned." The county provides the agency - part of a nationwide network of so-called community action agencies - $300,000 a year for administration costs.

"My first reaction was, is Head Start OK? Is the senior nutrition program OK?" Owens said yesterday. "They are some of the most basic, important services in the county. That day was a terrible shock to me."

Annapolis Mayor Dean L. Johnson said, "I want to make sure the people who receive services are not impacted by this financial difficulty."

The city contributes about $20,000 for a homeownership counseling program, Johnson said. The state of Maryland's involvement includes the $529,000 Maryland Energy Assistance Program. But the largest component by far is Head Start, with a budget of close to $2 million a year.

Jennings says Toal's examination has found that in each of the past two years, Head Start went over budget by $300,000, or 15 percent.

Toal discovered the problem with the taxes last fall, while completing the 1999 audit, Jennings said. He had asked the IRS for certain documentation and discovered no payroll taxes were forwarded between June 1998 and September 1999. The IRS had been unaware until then, she said. Toal could not be reached for comment.

The agency also has been penalized for missing deadlines to make pension contributions to the State Retirement and Pension System of Maryland. Jennings hopes to have those fines, which are far smaller than the amount owed the IRS, forgiven.

Jennings said the 13-member board - which includes members appointed by Owens, Johnson and state delegates - was misled. For months staff members said they could not provide financial statements, offering a range of reasons including computer problems, according to Jennings.

"It was one thing after another," she said.

The 35-year-old agency has gone through several financial officers in recent years, beginning with the departure of Joyce Hall about three years ago. Her successor lasted six months before he was let go in mid-1998 for "poor performance," Jennings said. It took six months to find a replacement. It was during this time that the taxes first were not paid, Jennings said.

One of several objectives outlined recently by Toal is "to ensure that the agency's payroll tax obligation is paid and that the agency can continue in its business of serving the public." Knight's "action plan" recommends continuing "to implement the current system of paying payroll taxes as required."

Separate accounts are now required for each program so that money bound for the IRS cannot be diverted to cover operating shortfalls, Jennings said. "You're not borrowing from Peter to pay Paul, so this can't happen," she said.

Although three members of the finance staff were laid off in late December, Jennings said Knight is going to be held accountable. "Certainly we feel there is a great deal of responsibility that rests at the desk of whoever is in charge. That's just obvious," she said.

Jennings said "one of the things we have our greatest problem with" is that Knight did not alert the board sooner.

Knight, who earned $44,828 last year, has been with the agency for nearly three decades. In 1999, she received the county Fannie Lou Hamer Award, named for the Mississippi civil rights activist who challenged the seating of that state's all-white delegation at the 1964 Democratic National Convention.

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