IRS rules Sedgwick County owes $159,000 in back taxes after audit

The IRS ordered Sedgwick County to pay back taxes of about $159,000 after a recent audit. The county will owe the state about $20,000.

The county plans to pay, although it says its bill to the feds should be about $3,160 less.

Auditors ruled that the county owed the back taxes because of options it offered to employees who took voluntary early retirement in 2011. The county gave those qualified for early retirement the option of 20 additional days of paid sick leave or health insurance for up to five years or age 65. Of the 119 people who took early retirement, 105 chose the insurance option.

Troy Bruun, the county’s deputy chief financial officer, said in an e-mail that the IRS ruled that “by being provided the cash option in lieu of receiving the health insurance coverage, the retiree is funding their continuing health insurance in retirement by what is considered an employee salary deferral. As such, this is a taxable benefit to the employee. The actual taxable benefit to the retiring employees who selected health insurance would be the value of the 20 days of additional pay that they could have selected.”

Employees who took the health insurance option will have to file an amended return, Bruun said.

“They may or may not have to pay additional tax,” Bruun said. “Sedgwick County will be paying 25 percent federal tax for the employee on the value of 20 days of additional pay. If an employee’s federal tax liability is greater than 25 percent, then they will need to pay additional tax. If it is less than 25 percent, they will receive a refund.”

County Manager William Buchanan said the county’s legal staff reviewed the voluntary retirement program, as did auditors.

“Even if we would have hired a tax attorney expert, I don’t know what their opinion would have been,” Buchanan said. “I think it’s important to note there’s no penalty, there’s no fine, we just owe back taxes. If we would have interpreted it this way two years ago, we would have paid it then.”