The Internal Revenue Service has reduced Grove City's tax debt by about $650,000.

The Internal Revenue Service has reduced Grove City's tax debt by about $650,000.

The IRS has agreed to waive most of the penalties and interest it assessed the city because of failure to pay payroll withholding taxes on time from 2007-2010, city officials announced at a press conference on April 22.

In December, the IRS told the city it owed about $685,905 in unpaid payroll withholding taxes, and an initial investigation by the city revealed discrepancies in the city's books beginning in 1999.

City finance director Mike Turner calculated in March that the city owed $790,184 in unpaid taxes, penalties and interest from 2007-2010, plus another $389,683 from 1999-2006.

Those bills, plus the $235,311 in city funds that Turner said are still unaccounted for, add up to more than $1.4 million.

The $650,000 in abatements will be a direct reduction to that total, Mayor Richard "Ike" Stage said April 22.

"Today, with the help of law firm Schottenstein Zox and Dunn, we got notified by the IRS that they are abating approximately $650,000 of penalties and interest, so it's great news for all of us here at City Hall," Stage said.

Harvey Dunn, senior consultant for the firm and a tax law expert, said because Grove City already has paid some of the penalties and interest, the IRS will issue the city a refund of about $42,000 in early May.

He said the IRS decision was based on evidence produced by the city that shows a reasonable cause for the delayed tax payments.

"The IRS considered the information we provided them and ultimately agreed that reasonable cause did exist," Dunn said.

Dunn said no specific standard for the threshold of "reasonable cause" exists.

Mailed notices of the late and unpaid returns were found among files in City Hall. Grove City administrators have since changed the way mail is handled, passing it directly to department heads.

"We had a hole in the system and we fixed it," Stage said.

Grove City police are conducting a criminal investigation of the city's finances and have determined that a theft occurred. No charges had been filed as of press time.

In addition, the Ohio Auditor's Office is examining city records and processes.

"They're in there looking at how the holes could have developed. How we've not caught these things earlier," Stage said, adding that he expects their investigation to be concluded within the next two months.