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Mellon Settles With US Government Over Destroyed Tax Returns

by Leroy Baker, Tax-News.com, New York

02 July 2007


Mellon Financial Corporation has announced that its subsidiary, Mellon Bank, N.A., has entered into an agreement with the United States Department of Justice to settle a dispute over the destruction of tax returns by the company's employees.

Mellon will pay the US government $16.5 million, and the Department of Justice will release Mellon from any civil or administrative monetary claims under the False Claims Act, in connection with the April 2001 incident in Mellon's Pittsburgh IRS Processing Unit, the company revealed in a statement last week.

"Claims under the False Claims Act were excluded from the settlement that Mellon reached with the US government in October 2002. Under that earlier agreement, Mellon reimbursed the Department of the Treasury for costs and expenses incurred by the government in connection with the IRS returns processing matter," the statement announced.

"Today's settlement and the 2002 agreement with the FMS eliminate any further exposure on Mellon's part to civil claims arising from the IRS incident. Under a settlement reached last August with the US Attorney for Western Pennsylvania, the US Attorney agreed to not prosecute Mellon if Mellon complies with the terms of the agreement, and Mellon agreed to have an independent third-party monitor compliance with the settlement for a three-year period," it added.

More than 70,000 tax returns were destroyed by Mellon employees in 2001 at the company's "lockbox" processing unit, after they came under pressure from management to meet an Internal Revenue Service processing deadline. The destroyed returns and payments had an estimated value of $1.3 billion.

Under the terms of Mellon's contract with the IRS, the company was required to complete the processing of the returns by midnight on April 29, 2001. Failure by Mellon to comply with this deadline would have constituted a breach of its agreement with the IRS. According to the Department of Justice, on the deadline day, a Mellon vice president falsely notified the IRS that Mellon had met the deadline. Mellon employees then destroyed tens of thousands of tax returns and checks it had received from taxpayers, all in an effort to deceive the government about Mellon’s timely completion of the 2001 tax program.

“The government must be able to rely on the integrity of its agents, especially those who handle tax receipts,” stated Peter D. Keisler, Assistant Attorney General of the Civil Division. "This settlement resolves the financial harm caused by Mellon’s conduct in destroying the tax returns.”

US Attorney for the Western District of Pennsylvania, Mary Beth Buchanan said that seven former Mellon employees had previously been charged in connection with the destruction of the tax returns and had entered guilty pleas in their cases. She observed that: “This resolution of the United States’ civil claims represents an additional step in the Department of Justice’s campaign to restore corporate accountability.”

The civil settlement is the third agreement between Mellon and the government to address the problems created by Mellon’s destruction of the tax returns.

In 2002, Mellon paid approximately $18 million as part of a separate administrative settlement with the Treasury Department, to reimburse the government for the value of the interest lost on the destroyed checks until replacement checks were received from taxpayers, as well as the costs incurred by the government in obtaining the replacement checks.

In an agreement with the US Attorney’s Office in 2006, Mellon agreed to amend its policies and procedures to strengthen its compliance and ethics programs, and additionally agreed to the appointment of a monitor to oversee Mellon’s corporate compliance program for three years.

The settlement resolves Mellon’s potential liability to the government under the civil False Claims Act. The False Claims Act imposes triple damages and civil penalties of up to $11,000 for each violation of the Act. Combined with the prior payments made by Mellon to the government, the additional $16.5 million brings Mellon’s total payments to more than $34 million.

The False Claims Act case was investigated by the Department of Treasury Inspector General for Tax Administration (TIGTA).


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