'We're applying for a refund'

0 Comments | Gazette, The (Colorado Springs), Aug 12, 2006 | by PAM ZUBECK THE GAZETTE

Not many people or businesses pay Uncle Sam more than they have to, but Colorado Springs Utilities has been an overly generous taxpayer.

The utility mistakenly gave the Internal Revenue Service an extra $1.1 million.

The overpayment was discovered during an audit, still under way, of all similar payments dating back decades. The audit has cost the department $92,400 so far.

Utilities earned the $1.1 million from investing borrowed money at a higher interest rate than the cost of borrowing.

The IRS requires those earnings, called "arbitrage," to be forfeited on bonds that are tax free for investors. The mandate is designed to prevent government entities from issuing more debt than is necessary and speculating in the bond market.

Depending on the acumen of an agency's investment advisers, the earnings can be significant. Since 2001, Springs Utilities has paid the IRS $12.3 million in profits from investing bond debt.

In 2003, the city realized it needed to better compute interest earnings and hired Denver audit firm Causey, Demgen & Moore Inc. to review calculations on Springs Utilities' entire $1.4 billion debt to determine any overpayments or underpayments to the IRS.

Auditors found that on a 1991 bond issue, the city paid $1.1 million too much twice -- in January 1996 on the preceding five- year period and again in January 2002 on the preceding five-year term.

Review of the entire debt's interest earnings was to be completed by mid-2004 but is two years overdue.

The delay, Utilities officials have said, is "due to the complexity of the IRS regulations and the extraordinary volume of transactions." Utilities has issued a dozen bond issues in the past five years alone.

Bill Cherrier, Utilities general manager for financial services, predicted other mistakes would total roughly $400,000, but he couldn't say whether that amount is in the city's favor or not.

If the city owes the IRS money, it could be charged penalties and interest, he said. The IRS also has the authority to audit the city's calculations.

Cherrier said the review will ensure the city is square with Uncle Sam and on course to stay that way.

"We're getting all arbitrage calculations up to date, and that will be kept up to date on an annual basis," he said.

As for the $1.1 million, "We're applying for a refund," Cherrier said.

CONTACT THE WRITER: 636-0238 or pam.zubeck@gazette.com