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Auditors: Franchot's office miscategorized 14,000 tax returns, sent $8.7 million to wrong towns

A state senator says an audit of the comptroller shows "deep failures of basic revenue collecting functions."

The office of Maryland Comptroller Peter Franchot distributed $8.7 million in tax revenues to the wrong towns in Montgomery County, state auditors say in a report to be released on Thursday.

Auditors blame the mistake on the erroneous classification of more than 14,000 returns.

Auditors also found problems with how the office handles out-of-state tax credits, keeps information secure, and issues replacement refund checks. The audit, obtained by The Baltimore Sun, is expected to be broadly released Thursday.

The comptroller's office said it has worked diligently to correct the mistakes.

Franchot, a Democrat, defended his office Wednesday.

"We have the finest comptroller's office in the country," he said. "I have a terrific staff of people."

Franchot said his office inherited the revenue distribution problem from previous comptrollers, discovered and corrected it. He said he worked with the Maryland Association of Counties to resolve the erroneous transfers, and put jurisdictions that had been overpaid on lenient repayment schedules.

But critics used the findings to paint Franchot as a grandstanding politician who is failing to run his own office.

"The report highlights deep failures of basic revenue collecting functions," said state Sen. Bill Ferguson, a Baltimore Democrat who has clashed with Franchot in recent weeks. "This type of audit hits at the central reason Marylanders are ever more distrustful of typical politicians who focus on media attention instead of their core job functions."

As one of three officials on the state Board of Public Works, Franchot has led an effort to force school officials in Baltimore and Baltimore County to install air conditioning units more quickly than they planned.

Franchot and Republican Gov. Larry Hogan, who chairs the board, voted this year to withhold millions of dollars in state school construction money until local officials presented plans to pick up the pace. That vote drew criticism from local school officials and Democrats in the General Assembly.

On Monday, Franchot and the NAACP called hot classrooms "a blatant neglect" of students' civil rights and asked the U.S. Department of Justice to investigate.

School officials in Baltimore and Baltimore County say they are working steadily to upgrade aging school facilities and that rushing to install temporary air conditioners in schools not equipped for them is wasteful.

State Sen. Richard S. Madaleno, a Montgomery County Democrat, said the audit shows that Franchot should focus on running his office.

"There's a need for a renewed focus on the backbone of the comptroller's office," Madaleno said. "The comptroller's public persona seems to suggest he hasn't been working as much on the backbone."

A spokesman for Franchot said the comptroller's office identified the problem with the tax returns nearly a year ago, informed Montgomery County officials and the public, and quickly worked to improve.

Spokesman Peter Hamm said anyone who hopes Franchot will drop the fight over air conditioning have miscalculated.

"We're sorry that they think it's shameful that we bring up air conditioning," Hamm said. "But we're not going to stop bringing up air conditioning until it happens."

Franchot accused Senate President Thomas V. Mike Miller, a longtime nemesis, of politicizing the audit.

"There was no money lost," he said. "The Senate president and staff have tried to inflate this issue."

Miller, through a spokesman, called Franchot's charges "asinine."

The revenue administration division of the comptroller's office was audited by the Office of Legislative Audits, part of the Department of Legislative Services, which supports the work of state legislators.

The audit began after officials received complaints that tax returns in Montgomery County were using incorrect special tax rates for the towns that set their own tax rates in addition to the county and state rates.

Auditors found errors in the returns of 14,861 taxpayers that resulted in the transfer of $8.7 million to the wrong jurisdictions.

Auditors found 1,393 tax returns that had addresses that were not legitimate, and reported that the comptroller's office did not investigate. They concluded that the comptroller's office policies were deficient, and managers did not sufficiently train employees to catch such errors.

In a response to the audit, officials from Franchot's office said errors were made in just a small percentage of the tax returns they process.

"For tax years 2010 to 2014, more than $6 billion was distributed," they wrote. "The reallocation represents less than 0.2% of the total distributing during this period."

But state Del. Bill Frick, a Montgomery County Democrat, said the errors have been "very problematic" for communities such as Chevy Chase and Rockville, which have their own tax rates.

"Some municipalities already received revenues and spent them. That's an egg you can't unscramble," Frick said. "The municipalities that were shortchanged are understandably eager to get their own hands on the revenues they were entitled to."

Hamm said towns have until 2024 to begin paying back the funds. He said those who received too little money have already been made whole.

Auditors also took issue with the way Franchot's office processed out-of-state tax credits. They said required documentation for the credits could not be found.

Auditors said they examined 20 tax returns claiming out-of-state credits for the year 2013 and noted that six — totaling $27.2 million — lacked the documentation needed to award the credits.

Auditors also said supervision of "significant financial adjustments to corporate taxpayer accounts" was inadequate, and that the office lacked documentation that $125 million in replacement refund checks were reviewed properly.

Two top officials defended the office in a letter to legislative auditor Thomas J. Barnickel.

Deputy Comptroller Sharonne Bonardi and Revenue Administration Division director Wayne P. Green wrote that the office is "committed to providing first-class taxpayer service."

"We've detected and blocked more than 11,600 fraudulent returns worth nearly $20 million in 2016 alone — on top of the 64,859 fraudulent returns that the Comptroller's Office has blocked and detected since 2007," they wrote. "The comptroller welcomes any opportunities for growth and improvement that will make our agency more effective and efficient."

But Ferguson said the audit shows Franchot should focus on running his office rather than fighting over air conditioning.

"We need to take a closer look at the extent of these problems," Ferguson said. "It's scary to think what else we'll find when we look deeper into managerial decision-making and executive staffing in the office."

Hamm said the comptroller's office is conducting a statewide audit to make sure there aren't similar problems in other jurisdictions.

So far, he said, they have not uncovered errors in towns outside of Montgomery County.

Madaleno said it seems unlikely the errors were confined to Montgomery County. He said the audit shows the need for technology upgrades in the comptroller's office.

"We're still waiting to find out how widespread it was," he said. "I hope this is a wake-up call about why it's important to have a world-class technology system in the comptroller's office. It's not sexy to invest money in a new tax system, but you can see a lack of investment has consequences."

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An earlier version of this article misstated the number of years Peter Franchot has been Maryland's comptroller. He has held the office since 2007.

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