LITTLE ROCK, Ark. — The Arkansas lottery's chief financial officer said Wednesday that a $90,000 tax penalty probably resulted because of a data input error, though legislators remained puzzled over how the lottery's director wasn't told of the problem for more than three months.
Lottery director Ernie Passailaigue told members of the Lottery Oversight Committee that he was "disappointed" he wasn't told of the Internal Revenue Service problem until long after it had emerged.
The IRS assessed the penalty because the lottery made late payments of withholdings from prizes. Passailaigue explained that those payments are now made daily, which should prevent a repeat of the problem. He also said he believes the IRS is incorrect about at least some of the payments at issue.
Passailaigue said he didn't learn of the problem until Aug. 10, well after chief financial officer Philip Miley was notified by the IRS of the penalty in April.
Sen. Jonathan Dismang, R- Beebe, said lottery officials need to ensure that important issues are brought to the attention of the director, the Lottery Commission and the legislative committee.
"I'm not sure if I still follow the chain of command and why there was the misstep and why there was no internal control to make sure there was the correct communication between the director and the CFO," Dismang said after the meeting.
During the proceeding, Dismang asked committee chairmen Sen. Johnny Key, R-Mountain Home and Rep. Mark Perry, D-Jacksonville, to send Miley a letter asking for his account of what happened.
Miley walked into the committee meeting a short time later and told legislators that he had expected the IRS to negate the penalty. But it was only when the IRS rejected the lottery's challenge this month that he notified Passailaigue.
Miley had already turned in his notice that he will leave his post next month. He also said telling Passailaigue about the IRS issue was part of his wrap-up, to let the director know about significant issues that were hanging.
Miley said he'd been going back and forth with the IRS since April 2010 and thought the penalty would be waived because the lottery was "diligently trying to follow the rules." Plus, he said it is the CFO's job to deal with the IRS, not the director's.
Dismang was not swayed.
"I'm going to argue there was a tremendous breakdown there," Dismang said.
But Miley said he expects a resolution in the lottery's favor.
"I am still convinced that the lottery is not in error," Miley said, adding that he believes the data input problem was on the IRS' end.
As a final question, Dismang asked Miley, "Why are you leaving?"
"The hostile work environment is really too much for me to handle; $80,000 per year is not worth it," Miley replied. He complained that events that would remain internal matters at a private company are aired publicly in government.
"It's hard on me and hard on my family," Miley said.
The lottery has enlisted Carrold Ray, a North Little Rock attorney to appeal the IRS penalty. Ray is not charging the lottery a fee.
The lottery's internal auditor, Barry Hyde, said the breakdown between Miley and Passailaigue "falls under the general control environment" within the office.
Hyde told legislators that one of the 40 categories he has stripped out for periodic auditing is tax payments and the issue will be reviewed.
Passailaigue told legislators that of the 13 Legislative Audit Committee findings from last fiscal year, 12 of them have been cleared. The remaining issue is generating a year-end report that conforms to generally accepted accounting practices.
Rep. Bill Pritchard, R-Elkins, said that as a member of the Audit Committee he took a dim view of the batch of findings in the last audit.
"The Audit Committee has no patience at all with repeat findings," Pritchard said.
The lottery has to enter into a contract with a firm, Crow Horwath LLP of Irving, Texas, for about $55,000 to train workers to generate a comprehensive annual financial report and to produce the next report.
About 25 legislators turned out for the meeting, more than double the 12 members of the joint committee.