CITY OF ORLANDO AUDIT OF EMPLOYEE FRINGE BENEFITS RELEASE DATE: APRIL 4, 2016 REPORT NO OFFICE OF AUDIT SERVICES AND MANAGEMENT SUPPORT

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1 AUDIT OF EMPLOYEE FRINGE BENEFITS RELEASE DATE: APRIL 4, 2016 REPORT NO CITY OF ORLANDO OFFICE OF AUDIT SERVICES AND MANAGEMENT SUPPORT George J. McGowan, CPA Director Perez Goree, CPA Audit Program Manager

2 TABLE OF CONTENTS MEMORANDUM OF TRANSMITTAL... 3 SUMMARY OF RECOMMENDATIONS, MANAGEMENT RESPONSES AND ACTION PLAN. 5 ISSUES, RECOMMENDATIONS AND MANAGEMENT ACTIONS... 7 No policy and procedure for take-home vehicles for Fire Department Employee Fringe Benefits i

3 MEMORANDUM OF TRANSMITTAL To: Michelle McCrimmon, Controller From: George J. McGowan, CPA Director, Office of Audit Services and Management Support Dates: Release: April 4, 2016 Subject: Employee Fringe Benefits (Report No ) At your request, the Office of Audit Services and Management Support performed an audit of the processes and controls over the administration of Employee Fringe Benefits. The audit objectives were to determine if the City meets Internal Revenue Service (IRS) standards for various employee fringe benefits and ensure the City is withholding proper amounts from employees pay and submitting those payments per IRS guidelines. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The following report contains an issue identified during the audit, a recommendation for improvement and management s reply regarding actions taken/planned to be taken with respect to the identified issue. We appreciate the cooperation and courtesies extended by the staff of the departments consulted during the course of this audit. GJM/PG c: David Dunn, Fleet & Facilities Management Division Manager Deborah Girard, Deputy Chief Administrative Officer Imtiaz Khan, Assistant Controller Jody Litchford, Deputy City Attorney Roderick Williams, Fire Chief

4 SUMMARY OF RECOMMENDATIONS, MANAGEMENT RESPONSES AND ACTION PLAN

5 SUMMARY OF RECOMMENDATIONS, MANAGEMENT RESPONSES AND ACTION PLAN MANAGEMENT RESPONSE & ACTION PLAN # RECOMMENDATIONS CONCUR PARTIALLY CONCUR DO NOT CONCUR ACTION PLAN TARGET DATE 1. Orlando Fire Department should develop policies and procedures for managing its vehicles. A portion of the policy should X clearly define what an unmarked vehicle is and who determines which staff members will receive them. This policy should be reviewed and approved by the Office of the Chief Administration Officer. Employee Fringe Benefits 5

6 ISSUES, RECOMMENDATIONS AND MANAGEMENT S ACTION PLAN

7 ISSUES, RECOMMENDATIONS AND MANAGEMENT ACTIONS BACKGROUND As requested by Accounting Management, the Office of Audit Services and Management Support performed an audit of the processes and controls of administering Employee Fringe Benefits. The audit objectives were to determine if the City meets Internal Revenue Service (IRS) reporting standards for various employee fringe benefits and ensure the City is withholding proper amounts from employees pay and submitting those payments per IRS guidelines. Accounting Operations is responsible for processing payroll for City Employees. The Police and Fire Department Fiscal Management Staff also assist with payroll processing for their respective units. Part of our research for this engagement led us to identifying what the IRS deemed as the most risky areas that governmental units have in staying compliant with IRS Regulations. One of the highest areas was employee use of City owned property. Employee Fringe Benefits 7

8 OBJECTIVES AND SCOPE The audit objectives were to determine if the City meets Internal Revenue Service (IRS) standards for various employee fringe benefits and ensure the City is withholding proper amounts from employees pay and submitting those payments per IRS guidelines. The scope of our audit covered a two year period of payroll transactions from the January 2014 to November METHODOLOGY To gather an understanding of IRS rules and regulations related to employee fringe benefits, we reviewed various IRS publications, Internal Revenue Code Title 26, and attended IRS Webinars specifically geared toward employee fringe benefits for government entities. Additionally, we reviewed various City Policies related to fringe benefits and cross-referenced them to IRS regulations. We also interviewed various personnel and reviewed payroll reports and procedures to gain an understanding of, and to form a basis for selecting specific transactions for review. To accomplish the objectives of our audit we interviewed staff and discussed key policies and procedures which aided us in selecting data to test. We also discussed with management its processes and procedures for managing takehome City vehicles assigned to employees. There were specific types of fringe benefits we tested for IRS and City compliance where we found no exceptions. These areas were: Employee achievement awards are properly included as taxable wages Employee Fringe Benefits 8

9 Educational expenses reimbursed to employees did not exceed annual limits defined by IRS regulations Reimbursements to employees for commuter train transit passes did not exceed monthly limits defined by IRS regulations Group Term Life Insurance benefits greater than $50,000 annually are properly included as taxable wages Leave time sharing benefits received from other employees properly included as taxable wages Employees that received tickets to events properly included amounts as taxable wages if the employees were not representing the City on official business for the event Employees with 457(b) contributions did not exceed IRS annual limits Employee use of City-issued cellular phones were issued within IRS guidance because the phones were not issued to employees as compensation but as a condition of work. (Please note that Audit Services only reviewed this area for IRS compliance. We did not review this area for compliance with City Policy Request and Use of Cellular Phones. This policy calls for Directors and Office Heads to review a copy of the cell phone charges for detecting abuse.) Employee Fringe Benefits 9

10 ISSUES AND RECOMMENDATIONS No policy and procedure for takehome vehicles for Fire Department City Policy Assignment of City Vehicles on a Twenty- Four Basis states that the Fire Department s use of take-home vehicles shall be covered by its own internal department policy. A portion of the policy should clearly define what an un-marked vehicle is and who determines which staff members will receive them. This definition within the policy helps protect those affected from potentially having to claim as income the use of an un-marked vehicle. The IRS publication 15-B Employer s Tax Guide to Fringe Benefits defines marked vehicle. Publication 15-B states A vehicle that is clearly marked, through painted insignia or words, police, fire, and public safety vehicles. We have discussed these conditions with the management of the Fire Departments and believe that the vehicles used by some employees are not properly marked to ensure proper exclusion of their use as income to the affected employee assigned the vehicle. In our opinion, this discrepancy leaves room for possible interpretation by the IRS to classify the vehicles as unmarked vehicles and have the City treat this fringe benefit as taxable income reportable on the employee s W-2. IRS Publication 15-B designates the exemption of income for unmarked vehicles used by law enforcement officers if the use is officially authorized. For this reason, Orlando Fire Department should create detailed policies and procedures on the management and marking of vehicles, use and assignment of take-home vehicles, and who is Employee Fringe Benefits 10

11 authorized to use an unmarked vehicle. The Office of the Chief Administrative Officer should review and approve the proposed policy. The Orlando Police Department has a model policy that can be used as a guideline. Recommendation 1 We recommend the Orlando Fire Department create policies and procedures for the management and marking of its vehicles and that these procedures clearly define who can be assigned an unmarked vehicle. This policy should be reviewed and approved by the Office of the Chief Administrative Officer. Concur. MANAGEMENT RESPONSE Employee Fringe Benefits 11