Photo by Jon Anderson
Hoover Council President John Lyda and Council President Pro Tem Curt Posey participate in a special-called council meeting at Hoover City Hall on Thursday, Aug. 29, 2024.
The Hoover City Council on Thursday voted in a special-called meeting to pay the Internal Revenue Service more than $78,000 in penalties related to late tax payments and failure to file timely and accurate reports with the IRS regarding money owed to the IRS.
The IRS claims the city owes it more than $200,000 in penalties and interest, but the city still hopes some of that amount will be reduced if the city can prove it doesn’t owe the money, Chief Financial Officer Jennifer Cornett said.
The city hopes it can prove that some of this $78,000 isn’t owed also, but the city needs to go ahead and pay it before the IRS issues a lien against the city, Cornett said. A final demand letter has been received for that $78,000, she said.
The problems stem back several years and appear to be related in part to new financial software the city implemented in recent years. That system turned out to be a “disaster,” Mayor Frank Brocato said. Numerous employees, particularly those in the public safety departments who have complex payment arrangements, were either overpaid or underpaid, and it was a recurring problem, city officials said.
As a result, there also were discrepancies on the amount of taxes owed on those earnings, said Cornett, who started as the city’s new chief financial officer in January.
Compounding the problem is that the city did not resolve the payment discrepancies with the IRS, she said. There was no reconciliation with the IRS concerning errors in compliance reporting since 2021, she said.
“These notices have been stuck in a file and not responded to,” Cornett said. “When you get something from the IRS, they’re not going to go away. You’ve got to respond to it. The biggest way you can get yourself in trouble is to file it and do nothing.”
She noted that, with involvement from U.S. Rep. Gary Palmer, the city was able to get the IRS to waive $170,000 worth of penalties and interest from problems that started in 2020. It was during that timeframe that a former payroll manager for the city died and was not able to complete training of a new employee.
While she was surprised the IRS forgave that large amount, it doesn’t help the city’s case now that the city didn’t take action to correct the problems, she said. As she has discovered these issues, steps are being taken to try to remedy the situation, she said.
At Cornett’s request, the city hired an outside forensic auditing firm to examine multiple problems with the city’s finances, including deleted electronic records, missing files, unbalanced transactions, unreconciled accounts and delayed financial reports.
That firm made a presentation to the City Council on Aug. 19 and said it did not find any evidence of financial fraud, malfeasance or asset misappropriation.
However, weaknesses in internal controls, multiple staffing issues and an inadequate implementation of the new financial software system created an environment within the Finance Department where issues were not resolved promptly and accurately, and backlogs began to mount, according to the outside audit report.
“Staff that lacked experience and technical skills found themselves overwhelmed and without the proper training to adequately perform critical tasks within the department,” the report said. “Although we did not identify specific evidence of financial malfeasance or asset misappropriation by Hoover employees, the deficiencies noted throughout this report could create an opportunity to commit financial fraud.”
Hoover Councilman Steve McClinton said he found the outside audit report very concerning.
While it’s great there was no evidence of fraud or misappropriation, “that’s like saying, ‘I have a good bank because no one robbed it.’ That’s a pretty low standard,” McClinton said. “I think Hoover has higher standards than that.”
McClinton noted a statement in the audit report that talked about the cash balances in Hoover’s financial records being incorrect due to a lack of timely bank account reconciliations.
“The implication(s) of not having correct and accurate financial books and records in a timely manner include making uninformed financial decisions (e.g., spending money that the City does not have),” the report said.
McClinton said he found it disturbing that the City Council was not informed about these IRS problems and other problems with the city finances for so long. He and some of his colleagues on the City Council have been calling for more transparency because they are responsible for oversight of the city’s finances, he said.
He hopes the City Council will be heavily involved in the process to correct financial problems to make sure this does not happen again, he said.
Cornett has said she is requesting five new employees for the Finance Department to help remedy an understaffing problem.
The City Council also on Thursday voted to create a new position of payroll manager as a first step in adding staff. That position should cost the city about $110,000 a year, plus benefits, Cornett said in an email to the City Council.
