Unemployment tax repayment causes confusion

Indiana's plan to balance an unemployment insurance fund hit hard during the recession might have caused businesses to pay more than they owed, although no one seems to know how many companies were involved or the level of impact it had on them.

Indiana Department of Workforce Development Auditor Cathy Luff said Tuesday that businesses she examined in 2011 had overpaid because of confusion over when higher unemployment taxes approved by lawmakers in 2009 took effect.

Meanwhile, Luff said she was removed from her auditing duties last Thursday after talking with WISH-TV about her concerns. A spokesman for the Department of Workforce Development said Luff is still employed by the state and has not been formally disciplined in any way, but declined further comment citing personnel confidentiality.

Department Commissioner Scott Sanders said Monday that if companies did incorrectly calculate how much they owed the state, it is up to them to let the department know and seek that money. He called it "a self-reporting process."

"So employers would need to go back and take a look at what they filed and if they filed incorrectly, by all means come back and submit a corrected return," Sanders said. "We'll be happy to issue them a credit memo and a refund if that's what they would like."

Neither Luff nor the department knows how many businesses overpaid the state or by how much. But of the 91 audits Luff performed last year, roughly 15 percent of the businesses made this mistake. She said she cannot reveal the names of businesses she audited because it is confidential information.

The state is obligated to help them get their money back, Luff said.

"I believe what happened is they don't want to give money back," she said Tuesday of the Department of Workforce Development, citing the need to bring the state's unemployment fund back into solvency following the spike in unemployment claims during the recession.

"At a minimum DWD should notify employers to go back and check to see if they reported correctly," she said.

The trouble stems from Indiana's efforts to repay roughly $2 billion in loans from the federal government to cover unemployment costs as the recession hit. Lawmakers developed a two-pronged plan in 2009 to deal with the problem by increasing the tax businesses pay into the insurance fund and increasing the amount of employee wages taxed from the first $7,000 earned by each worker to the first $9,500.

That latter bump, in the amount taxed, is what caused the current problem. The new plan was set to take effect at the start of 2010, but lawmakers delayed the tax hike a few months later, leaving businesses with the lower tax burden through 2010 — whether they knew it or not.

Both Luff and the Department of Workforce Development suspect the problem stems in part from businesses using software like Quickbooks that was updated at the start of 2010 with information that was out-of-date after lawmakers delayed the tax hike in March.

Because the companies file their own calculations, only state auditors such as Luff would have caught the mistake and the department audited only 2.5 percent of employers last year.

Luff first discovered the problem last year when auditing payments for 2010 and reported it to her bosses at the department. She said she decided to go to the media after the department did nothing to reduce her level of concern.

"It strikes me that there really is responsibility on both ends of this equation," said Craig Hartzer, a Department of Workforce Development commissioner under former Gov. Frank O'Bannon.

It was up to businesses to be aware that the changes were coming, but the state was responsible for doing everything possible to let them know, said Hartzer, who now teaches at Indiana University's public affairs school.

Democratic gubernatorial candidate John Gregg called the problem another example of mismanagement by the state, following the discovery of $526 million in tax errors, and asked for an immediate audit of state government. But the unemployment insurance problem appears to have little in common with the other, massive tax mistakes discovered by the state over the last half-year.