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Gary school district wins state permission to approach IRS with debt settlement offer

Members of the Indiana Distressed Unit Appeals Board meet Thursday at the Indiana Government Center in Indianapolis.

INDIANAPOLIS — The Gary Community School Corp. is preparing a settlement offer to clear off its books the more than $8 million it owes the Internal Revenue Service.

On Thursday, the Indiana Distressed Unit Appeals Board authorized the district's emergency management firm, Gary Schools Recovery LLC, to spend up to $320,000 to settle the debt, with $64,000 paid at the time the district makes the offer.

"It's important to know that this is just an offer only," said Courtney Schaafsma, DUAB executive director. "It still has to go through multiple levels of approval at the IRS.

"However, because this dollar amount is at the point where DUAB would have to approve it (over $30,000), we felt it was important for DUAB to act before the offer was made, so that would not form any roadblocks as it goes through the process at the IRS."

The debt initially was incurred during the 2013-14 school year, when the district's trustees permitted the school administration to use employee payroll withholdings to cover operating expenses — instead of sending that money to the IRS, as required by federal law.

School employees were credited with paying their taxes since the money was withheld from their paychecks. But penalties and interest accrued since then have grown the district's debt to approximately $8.5 million.

In response, the IRS has put liens on all the buildings owned by the Gary Community School Corp. that prevents their sale, reuse by another entity or demolition, in the case of numerous shuttered schools that now are in significant disrepair.

Leonard Moody, the school corporation's current chief financial officer, demurred when asked why the IRS would settle such a large debt for a comparatively small payment.

"It's a process," Moody said. "You go back and forth, and we end up where we end up."

The elected Gary school trustees last year were supplanted by a state-appointed emergency manager after repeatedly failing to match district spending to revenue, and racking up more than $100 million in debt.

Then and now: The high schools of Gary

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Dan is Statehouse Bureau Chief for The Times. Since 2009, he's reported on Indiana government and politics — and how both impact the Region — from the state capital in Indianapolis. He originally is from Orland Park, Ill.