"It may be six months or more before the scope and magnitude of this problem is fully known," Senate Finance Committee Chairman Max Baucus, D-Mont., said Wednesday as the committee reported the bad news.
The Internal Revenue Service has acknowledged that a previous estimate of 1,800 lost or destroyed payments was only a "small fraction" of the actual total, Baucus said.
The tax returns and payments were sent by taxpayers in New England and parts of New York state this year to a Pittsburgh lockbox run by Mellon Bank under a contract with the federal government. Earlier this month, Mellon lost its contract to run the facility following what the bank's chairman called "gross disregard" and failure to follow company policy by some employees.
The IRS and the Treasury Inspector General for Tax Administration are investigating the incident, which Baucus said appears to be confined to the Pittsburgh facility. IRS officials declined comment Wednesday on the probe but said they were working with taxpayers to address any problems.
It remains a mystery exactly what happened to the returns and payments or whether the incident was deliberate or a mistake. All that investigators or Mellon Bank will say publicly is that it does not appear to be a case of identity theft, stolen checks or disclosure of sensitive taxpayer information.
Mellon's Chairman and Chief Executive Officer, Martin McGuinn, said in an e-mail that "several" bank employees were fired after an internal probe found taxpayer submissions that were "hidden, and in some cases, destroyed." Loss of the contract resulted in layoffs of 106 other employees, many of whom have found new assignments within the bank.
The investigation began after taxpayers began contacting the IRS when their payment checks had failed to clear. Sen. Charles Schumer, D-N.Y., said the agency has now received 22,000 complaints of uncashed checks.
Affected taxpayers submitted tax returns and payments this year to the Pittsburgh lockbox from Connecticut, Maine, New Hampshire, Vermont, Massachusetts, Rhode Island and parts of New York outside of New York City and Nassau, Rockland, Suffolk and Westchester counties.
Also potentially affected were taxpayers from those areas who submitted estimated tax payments and those who made payments along with a request for an extension to file their returns.
Baucus said "an untold number" of taxpayers likely aren't even aware that their returns and checks were lost or destroyed. He recommended they review bank records to determine if any check sent to the IRS failed to clear.
The IRS already has set up a special unit to handle these cases. Taxpayers who suspect they may be affected should call the agency at 1-800-829-1040. The IRS is asking them to stop payment on the uncashed check and send a nereturn and check to the IRS service center in Andover, Mass.
The IRS will treat a replacement check and return as filed on time from affected taxpayers, meaning they won't owe any penalties or interest. Taxpayers can also get reimbursed by the IRS for any bank fees by filing IRS Form 8546.
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