IRS opens detailed audit into Phila. School District's financial practices

The Internal Revenue Service has launched an in-depth audit of the School District of Philadelphia's financial practices, personnel policies, and payments to contractors.

One IRS document obtained by The Inquirer lists 28 specific areas of inquiry and seeks information on reimbursements for travel and meals, the use of district automobiles and credit cards, and "checking account data for payments that are processed outside the district's general fund."

Amid the audit, which focuses on calendar year 2009, the district on Wednesday abruptly fired its payroll director, who had been dealing with IRS requests since April.

Eileen Pelzer was dismissed, according to sources, after senior district officials blamed her for not informing them of the IRS inquiry or that its scope had broadened to include questions about how School Reform Commission members were reimbursed for expenses and details of payments to independent contractors.

School district spokeswoman Shana Kemp confirmed the audit of the district, which has a current budget of $3.2 billion. She described the inquiry as random and routine and disputed that it included the SRC, the five-member board appointed by the governor and the mayor to oversee the district.

Kemp declined to discuss Pelzer's dismissal, saying the district, as a matter of policy, did not comment on personnel matters. Pelzer, who had been employed by the district since July 2008, also declined to comment.

An IRS spokesman declined to comment.

The auditors arrived at school headquarters on Tuesday - the same day that Superintendent Arlene C. Ackerman and her administrative team appeared before City Council to ask for tens of millions in additional funding to help the district plug a projected $629 million shortfall.

Auditors were asking why some people were given both W-2 forms, indicating employee status, and 1099 forms, indicating contractor status, sources said.

The auditors also asked whether SRC members were on the payroll and how their expenses were reimbursed, the sources said. They also wanted to know about charter-school funding.

Sources, including district employees, said senior officials were unprepared to answer some of the questions the auditors asked this week and had to request an extension. The employees asked not to be identified by name because they were not authorized to discuss the audit or Pelzer's termination.

"We intend to fully comply and answer each of the items," Kemp said in a statement. "The day that IRS auditors arrived, Tuesday, May 24, the start of the City Council budget hearings, we realized that an oversight had occurred and requested the opportunity to reschedule the meeting with them. They graciously agreed to come back at a later date."

Auditors had been scheduled to spend Tuesday through Thursday this week conducting their inquiry at district headquarters, 440 N. Broad St.

During a meeting Wednesday morning with Michael Masch, the district's chief financial officer, Estelle Matthews, who oversees the district's human-resources department, and about a half dozen others, Pelzer was questioned about the IRS inquiry, according to sources.

Pelzer, the sources said, told them she had informed her supervisor what the IRS was planning.

Matthews fired her at 4 p.m.

Matthews and Pelzer have had a tumultuous relationship since Pelzer filed a code-of-ethics complaint against Matthews with the district legal department in 2009, according to district sources.

The complaint accused Matthews of unprofessional behavior at a meeting on the district's vacation-pay policy, sources said.

Matthews cursed, slammed her books, and walked out of the meeting, the complaint alleged, according to the source. Nothing came of the complaint, a source said.

Matthews did not return a call for comment.

In January, Pelzer's department was transferred from finance to human resources, which Matthews heads. Pelzer was directed to report to a project manager who had a lower pay grade than she did, sources said.

Despite her conflict with Matthews, Pelzer received a positive performance review from the district in August 2010, sources said.

There is no indication that the IRS audit of the district was related to two federal tax liens totaling $98,000 filed against Ackerman, the most recent last February.

Her tax accountant said the filings stemmed from her previous employment as superintendent of schools in San Francisco in 2006 and 2007.

IRS auditors asked the School District of Philadelphia for 2009 documents, including:

with all independent contractors and subcontractors.

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