Minneapolis Public Schools assessed $5.3 million in tax penalties in past four years

Minneapolis Public Schools has incurred over $5.3 million in tax penalties from the IRS since 2022. The penalties were assessed for a range of issues, including $2.9 million for errors calculating and reporting employment taxes and another $2.3 million for late filing of Forms W-2 and Forms 1095-C. 

That’s enough to pay about 40 teachers, given current district labor costs.

The IRS penalties were assessed starting in June 2023 and continued into the current month, according to information provided by Ryan Strack, senior executive officer for MPS.  

The district has thus far paid out $770,000 of the penalties and is working to get the remainder reduced.

“MPS is working with staff from (district consultant Center for Effective School Operations) and other tax specialists to determine steps that will prevent future penalties,” Strack said in a statement.

The district declined to make anyone available for an interview. 

References to the IRS penalties, which have not previously been reported, appear in a heavily redacted investigative report about another accounting misstep: As the Reformer first reported this week, the district improperly withheld $3 million from a health care trust account for paying insurance claims. The funds were ultimately transferred to the health account 10 months later. 

The law firm of Greene Espel, which was paid $120,000 to investigate the improper health care trust accounting maneuver, wrote that investigators inquired of multiple people to better understand the nature of the IRS liability, “But no one was able to explain what caused these tax penalties.”

The investigators recommended that the district consult with tax attorneys and go to the IRS “to determine how best to proceed.” The investigators also recommended the district develop a system to track this type of liability in the future, particularly given the significant turnover in the finance department and lack of institutional knowledge.

The IRS revelations are sure to raise questions among Minneapolis parents and educators, who are already suffering under the weight of the district’s financial problems. The dysfunction within the finance department comes as the district is facing a $50 million budget deficit brought on by decades of declining enrollment — and the state and local funding tied to it — as well as increasing labor costs. 

This year the district is eliminating hundreds of school-based support staff, including elementary school counselors and librarians, primarily in schools that serve its students in most need of extra support. At the same time, it is increasing the number of elementary teachers in order to meet class size caps that were negotiated as part of its contract with its teachers’ union.

Finance department in disarray

The Greene Espel investigation was commissioned after a prior investigation by Sepler & Associates of the finance department and revealed a dysfunctional work environment. In addition to the two investigations, the district had also placed senior finance officer Ibrahima Diop on a performance improvement plan, and issued him two written reprimands. His personnel record, released as part of a records request by the Reformer, shows documented performance issues going back to December 2024. He remained employed with the district until he resigned in December 2025 to take a job in Milwaukee. The Milwaukee school district then said Diop would no longer join the district after the Reformer reported that he’d been placed on leave.

After Diop resigned and the executive director of finance was terminated, the district hired the Center for Excellence in School Operations, or CESO, to staff its finance department. The district’s contract with CESO authorizes spending over $68,000 per month on services. The company is currently engaged in a review of the finance department, with an assessment expected in October. 

Neither the superintendent nor the school board has spoken about the withheld health care trust funds or the tax penalties in public meetings, but the district did publish its own version of events on its website on Apr. 13, the same day it released the Greene Espel report to the Reformer as part of a records request. 

In emails obtained by a Reformer records request, there are references to the district paying “941 penalties.” The IRS assesses employers penalties when they fail to pay payroll taxes on time. The penalty can range from 2-15% of the taxes owed. 

The emails also reference “1094/1095 ACA reporting” as a priority for the district. Employers with more than 50 employees are required to submit forms 1094 and 1095 annually as part of the Affordable Care Act. The IRS can assess penalties for failure to submit the forms on time. 

Although the IRS penalties are unrelated to the improperly withheld funds from the health care trust account, the report notes that that the health trust — called in the IRS tax code a voluntary employee benefit association, or VEBA — was never properly registered with the IRS when the district created it in 2017. It is unclear whether this failure to register the trust account has or will result in tax penalties for the district.

The Greene Espel investigators interviewed attorney Darcy Hitesman as a subject matter expert on VEBA trust accounts. Hitesman told them that the district could likely register the account retroactively, but that the withholding of the contributions could potentially impact their ability to do so.

Under federal tax law, employer-provided health insurance contributions made by both the employer and employee are exempt from federal taxes. For organizations like the district that self-insure, a VEBA trust is one way to segregate the funds to pay for employee health care claims while maintaining their tax-exempt status. The trust’s assets also grow tax-free.

According to the IRS, forms must be filed with the IRS within 15 months of creation of a VEBA trust, although a 27-month extension is often permitted. Retroactive registration, like the district would need, is also possible but subject to specific conditions. 

*Correction: Due to an editing error, a headline on an earlier version of this story misstated the tax penalty, which has been assessed but not paid.