The Internal Revenue Service has hit Medina City Schools with a bill for $60,791.65.
Most of the bill stems from the failure of the school district to withhold $47,991.18 in taxes owed on the school district’s payoff of Superintendent Randy Stepp’s old college loans.
Stepp directed the loans be paid with a $172,011.40 check to the U.S. Department of Education from the district’s “carryover fund” held by the Medina County Schools’ Educational Service Center, which provides services common to all the school districts in the county, such as training bus drivers and nurses and computer support.
The check was cut Jan. 9, 2012 — less than two months after the Medina school board amended Stepp’s contact and agreed “to pay the costs associated with the Superintendent’s acquisition of past academic degrees as they relate to education.”
The IRS audit ruled that the loan repayment, which was not included on Stepp’s 2012 W-2 tax form, was taxable as income, school officials announced Monday.
“The IRS is looking at that as income and withholding taxes should have been taken out,” interim Superintendent Dave Knight said Monday. “Because they weren’t taken out, we as a school district are responsible, according to the IRS.”
Knight was hired as interim superintendent after the school board placed Stepp on paid leave in April 2013, pending completion of a special state audit.
The board voted to fire Stepp on Oct. 24, two days after the auditors issued a preliminary report that found Stepp had spent at least $4,121 illegally.
The audit also reported a half-million dollars in spending from the Educational Service Center fund “in which the item’s proper public purpose was unclear” and nearly $1 million spent without proper authorization from the school district.
The state auditors raised the question of whether the loan payoff was taxable but referred that issue to the IRS.
Medina City Schools Board President Tom Cahalan said Monday he assumed that tip triggered the IRS audit, which began last fall.
He said the school board was told the results “in the last couple weeks.”
Cahalan said the board would not contest the audit and would move quickly to pay the bill.
“We will take the corrective actions necessary to meet the findings of the Internal Revenue Service,” he said in the prepared statement announcing the IRS audit. “Moving forward we will work very hard to meet all guidelines and standards set forth by the IRS.”
Asked if the district intended to try to recover the tax money from Stepp, Cahalan declined to comment on the advice of the school board’s attorneys.
“I’m not supposed to make any comments on the lawsuits,” he said.
Stepp has sued the district in both federal and county courts challenging his dismissal and demanding reinstatement of his new five-year contract, approved unanimously by the board in January 2013 at a work session without publicity.
Publication nearly two months later of the provisions of the contract, which included an $83,000 signing bonus in addition to the payoff of Stepp’s college loans, set off a storm of public protest.
The new contract added a clause requiring the school board to pay “any tax liability” resulting from the payment of Stepp’s college education costs.
Neither Stepp nor his attorneys could be reached for comment Monday evening.
The furor over Stepp’s contracts have resulted in a complete overhaul of the school board: As of January, all five members who unanimously approved Stepp’s contract a year earlier had been replaced.
Three board members — Charlie Freeman, Karla Robinson and Susan Vlcek — resigned and William Grenfell left in December at the end of his term after declining to run for re-election. The fifth member, Dr. Robert Wilder, retired in April.
Also gone is the district’s treasurer, Jim Hudson, who resigned in November to take the treasurer’s job at Avon Schools.
Hudson said he couldn’t comment on the IRS audit because “I’m not working for the district anymore, and I don’t know what’s going on there.”
In addition to Stepp’s unpaid taxes, the IRS auditors also billed the district for more than $9,000 in other taxes owed, according to the district’s prepared statement:
• $5,520.83 for uniform allowance for mechanics, maintenance, custodial and cafeteria employees required under union contacts;
• $1,616.38 for allowances for “wellness physical” for administrators;
• $488.25 for individuals who were hired by the district as independent contractors but should have been classified as employees;
• $1,375.02 for employees who “worked for the district in some minor capacity (co-curricular contract) and were rehired as a contracted service provider and should have remained classified as an employee.”
The district also was assessed a $3,800 civil penalty for 19 vendors from which services were purchased but the required IRS form 1099s were not issued. The district has more than 4,900 vendors on its active vendor list.
Knight said the IRS agents ruled the uniform allowance taxable because “these are personal items that can be worn in public.”
“Our contention was that they are school uniforms that we require staff to wear,” he said. “But the IRS ruled different.”
While not contesting the tax bill, Knight said the IRS audit “was frustrating.”
“Just when you hope things are being resolved, one more thing pops up,” he said. “The IRS isn’t going to wait for their money. This is one more worry added to the pile we tried to sort out.”
Contact reporter David Knox at (330) 721-4065 or firstname.lastname@example.org.