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Saturday, December 08, 2001

By Patricia Sabatini, Post-Gazette Staff Writer

More federal tax returns and payments were hidden or destroyed at Mellon Financial Corp.'s processing center in Pittsburgh earlier this year than previously thought.

According to figures received by Senate Finance Committee Chairman Max Baucus, D-Mont., the case now includes 71,257 returns involving payments worth $1.2 billion. That's up from the previous estimate of 40,000 returns worth $810 million. The initial estimate for the number of returns was in the hundreds.

Neither Internal Revenue Service nor Treasury Department officials would confirm the new figures yesterday, saying they don't discuss ongoing investigations. A Treasury official has said there has never been a tax revenue mix-up of this magnitude.

The Treasury launched its investigation after getting a flood of calls in May from people whose tax payment checks hadn't cleared.

A grand jury has now begun hearing evidence in the case.

The matter involves taxpayers in New England and upstate New York. Taxpayers in Pennsylvania were unaffected because their payments are handled by Bank One in Philadelphia.

Mellon has said several employees, who subsequently were fired, hid the returns because they couldn't keep up with the workload.

The financial services concern shut down its IRS processing unit in August after the Treasury terminated its contract, throwing 106 people out of work. Nearly all of those employees have since found jobs elsewhere in the company, Mellon said yesterday. The company had processed taxpayer returns on behalf of the IRS service center in Andover, Mass., since 1993.

In a letter to employees in September, Mellon Chairman Marty McGuinn said the company was taking steps to prevent a similar fiasco and was "deeply distressed" that Mellon's record was marred by the actions of a small number of employees.

Half of the 71,257 missing tax return cases have been resolved so far, meaning taxpayers have settled up their accounts, according to the information provided to Baucus' office.

The IRS is treating the returns as if they were filed on time, eliminating erroneous penalties and interest and reimbursing any stop-payment or other associated bank fees.

The agency so far has spent about $2 million fixing the mess.