Boston Public Schools used student activity accounts to pay employees under the table for extra work and did not report the income to the Internal Revenue Service, according to findings from an IRS audit that were obtained by the Globe.
The failure to report the earnings to the IRS means both the school system and the employees were not paying taxes on the income, a violation of federal tax law that can result in financial penalties.
The IRS also found that schools had used student activity accounts to pay for programs and other items not related to student activities, which also violates federal and state rules. Student activity accounts can only support experiences outside the classroom that supplement a student’s education, such as field trips or student clubs.
Much of the money for the student activity funds is generated by fund-raisers, unsolicited donations, and revenue generated from student events, most often through ticket sales.
The school department, which has kept the findings under wraps for months and told the School Committee about them only last week, would not say how much money or how many schools or employees were involved. The IRS would not comment on the audit.
The findings have prompted the school department to take widespread action to correct the problems. In June, Superintendent Tommy Chang ordered all principals and headmasters to immediately stop any direct payments to employees from the student activity accounts, according to a memo obtained by the Globe.
The school department has also been deactivating ATM cards associated with the accounts because it can be difficult to track spending with them. Officials are developing new procedures to tighten oversight of student activity spending across the system.
“We have begun to take a number of steps to retrain and educate staff to ensure all accounting procedures are appropriately adhered to,” Richard Weir, a school department spokesman, said in a statement.
The findings were described in a memo that Chang sent to principals and headmasters in June. The Globe obtained that memo this month. The city would not provide a copy of the full audit to the Globe last week.
The IRS came across the problem while conducting a routine audit of city finances. As part of the audit, the IRS randomly selected 16 student activity accounts for review.
The school department would not say last week how many schools have student activity funds, but most high schools and many other schools in the lower grades have them. The principal or headmaster at each school has direct oversight of the funds and can appoint a designee to help oversee the funds.
Samuel Tyler, president of the Boston Municipal Research Bureau, a watchdog funded by businesses and nonprofits, said the IRS findings show a lack of financial oversight by the central offices and a lack of basic accounting procedures at individual schools. He noted that the findings could jeopardize the credibility of future fund-raising efforts.
“These are all serious infractions,” Tyler said. “It’s important for parents, businesses, foundations, and others to have confidence that the dollars they provide are managed correctly at the school level. Otherwise it will diminish interest in supporting these programs.”
The IRS is the latest agency to reveal deficiencies in the school system’s financial oversight.
The Boston Finance Commission, an independent watchdog agency, has probed school spending several times in recent years.
One investigation, which ended in 2014, found the school department had funneled hundreds of thousands of dollars in taxpayer money to a nonprofit foundation, essentially creating a slush fund for the school system to pay for holiday parties, first-class plane tickets, and even moving expenses for a departing employee.
In 2012, the state Inspector General’s Office found the school system routinely overpaid for books by failing to shop around for the best deal, potentially costing taxpayers hundreds of thousands of dollars annually.
Matthew Cahill, executive director of the finance commission, said the IRS findings reaffirm the need for the school system to more closely monitor spending at the school level. He said at minimum “it would be advisable for the school system to do a year-end review of a sample of schools” to see how they are spending student activity funds.
According to guidelines developed by the state Department of Elementary and Secondary Education, school systems are supposed to designate someone internally to audit all student activity accounts annually, while systems as large as Boston can do a representative sampling.
Audits by outside firms should be done every three years for any account exceeding $25,000.
The guidelines also call for creating separate checking accounts and having the School Committee vote annually on how much money should go into them from the student activity accounts to safeguard against misspending and abuse.
“Recognizing that student activities’ monies belong to the students and not to the city/town/districts illustrate the need for sound business guidelines to be developed to govern these accounts to adequately control and safeguard these monies,” according to the state guidelines.
It’s not clear to what extent the Boston school system has been monitoring spending from the student activity accounts. But the school department is in the process of overhauling its policies and procedures on such accounts.
It also ordered principals this summer to move all accounts to a single bank — Citizens Bank — and provided all principals and headmasters with training in August, according to a copy of a school department slideshow presentation obtained by the Globe.James Vaznis can be reached at email@example.com. Follow him on Twitter @globevaznis.