The Española School District may be facing over $1 million in IRS penalties, after years of insurance reports were not submitted to the federal government.
Superintendent Bobbie Gutierrez discussed the penalties in front of the Legislative Education Study Committee, which she said were the fault of fiscal agents assigned by the state Public Education Department when the District’s finances were taken over three years ago.
“We’re facing right now over $1 million in penalties that we’re negotiating with the IRS,” she said. “That’s the ineffectiveness of the fiscal agents model.”
Lawmakers appeared shocked at the announcement.
The penalties come after the District failed to submit the required forms, known as 1094 and 1095 forms, which prove that employees were offered a health insurance plan by their employer. This occurred in 2016, 2017 and 2018, said Richard Halford, executive director of business and financial services for the District.
The 1094 and 1095 forms came about during the introduction of the Affordable Care Act, and act as a method for employers to prove that employees were offered an insurance plan, at which point they could either accept or use their own plan.
While employers have always been required to submit these forms, the IRS reportedly only recently began issuing penalties for failure to submit around the beginning of 2019.
Organizations receive a penalty for every single employee whose 1095 information is not submitted, and those penalties can snowball in an organization like Española School District, which has hundreds of employees.
Halford said he received a notice from the IRS soon after starting with the District in September. The notice was for the 2016 year and notified the District had to pay penalties of $430,000 for that year alone.
While he has not received a notice for 2017 or 2018, he said he suspects they will receive penalties for those years as well, which could bring the total to over $1.2 million.
Halford said he and his staff have struggled to contact IRS officials to confirm a definite number and due date.
“My payroll person spent 90 minutes on the phone and finally gave up,” he said.
He said he does not know what other charges could be included in the penalties.
“It could be accruing penalties and interest daily,” he said.
As far as how the District will pay the massive penalties, Halford said it will have to come out of the District’s cash balance.
Due to issues with the Department’s fiscal agents, the District’s exact cash balance remains unclear, but is estimated to be somewhere between $2.5 million and $3 million.
“I honestly think the cash is going to be around $2.5 million or so, and (the penalties are) about half of that,” Halford said.
If the District does pay $1.2 million in penalties, that means over 3 percent of the $31 million operating budget will be wiped out. By comparison, the District’s budget increased 4.8 percent over the last school year.
Gutierrez and Halford said they are attempting to negotiate that number down, whether that be in the form of a waiver or a more sustainable payment plan.
Halford said Chief Operating Officer Dan Romero and School Board Attorney Geno Zamora drafted a letter to the IRS explaining the District’s difficult financial situation and asking for leniency.
This is not the first budgetary mishap to occur during the Department’s financial takeover of the District.
In June, financial consultants hired by the District found the fiscal agents had committed several errors in the budget, placing monies in the incorrect funds and failing to file certain reimbursement forms. As a result of all these errors, the District has to redo its yearly audit.
District officials calculated they may lose $250,000 after agents failed to submit requests for reimbursement forms for the past two years.
Halford said Española might not be the only district to receive a notice from the IRS.
He received a notice while working at Santa Fe Public Schools for the same type of penalty. He also said he talked with other school business officials around the state who said they received the same notice.
The notices, he said, even came up during the New Mexico Association of School Business Officials September conference in Las Cruces. He said one of the moderators asked those in attending a session who received “that scary notice from the IRS.”
“More than half of them raised their hands,” Halford said.