The federal tax code is so complicated even the City of Madison has trouble deciphering it.
The city recently reached an agreement with the Internal Revenue Service to pay back $580,000 in taxes to the federal government over its failure to report some life insurance benefits as income for city employees. Madison is also in negotiation with the state Department of Revenue to settle on back taxes owed, which could cost around $300,000.
“We discovered (the error) over the past year-and-a-half and calculated the impact,” said city finance director David Schmiedicke. ”When we fully understood the federal tax law in this area we reached out to the IRS.”
Most employees can purchase up to $50,000 in group-term life insurance policies with pre-tax dollars, according to IRS code. In other words, the employee gets a tax break for purchasing some life insurance through work. The employer, too, reduces some of its payroll taxes owed for Social Security and Medicare.
The cost of premiums for any policy with insurance benefits exceeding $50,000 is supposed to be included as income to employees for tax purposes. But Scmiedicke said for decades the city failed to do that for approximately 2,200 employees.