Selling Free Fare Cards Could Lead to Prosecution

A recent GAO report finds that there has been considerable fraud with regard to the tax-free benefit given to federal employees who are receiving free cards to ride public transportation. But what about the money from the sale of those tickets? If you sold tickets, and did not report the income, you may want to seek legal advice.

Most readers may have noticed the article posted on the FedSmith website recently about the sale of public transit cards on the internet. The GAO report on its investigation is now available for anyone who wants to read more details on the investigation.

GAO only investigated a few federal agencies in the Washington, DC area. It found abusive and potentially fraudulent activity by employees at the Departments of Commerce, Transportation, State, Homeland Security, Defense, and the Treasury and at the Internal Revenue Service (IRS), the Patent and Trademark Office, and the U.S. Coast Guard.

GAO concluded that there is not any way to quantify the amount of fraud that is on-going with the subsequent sale of the public transit cards. It concluded: Using transit benefits records from seven of the nine agencies GAO reviewed, GAO determined that the amount of potentially fraudulent transit benefits claimed during 2006 in the National Capital Region was at least $17 million and likely more. This fraudulent amount could be millions more if a similar magnitude of fraud exists in the dozens of agencies GAO did not review, or if the other types of fraud GAO identified in this investigation could be quantified."

The federal government’s federal transit program has become a big business. Some agencies run their own programs and some contract with the Department of Transportation to distribute the free transportation cards to federal employees. The Transportation Department told investigators that as of July 2006, the portion of the program they administer had approximately 250,000 participants who claimed about $250 million worth of benefits.

This program was first set up with an executive order in April 2000. It is one of those programs that has good intentions and probably does help increase the number of people riding public transportation in the Washington area every morning and afternoon. The idea is to reduce federal employees’ contribution to traffic congestion and air pollution. In the Washington, D.C., National Capital Region, federal agencies are required to offer employees tax-free transit passes for public transportation to cover their actual out-of-pocket commuting expenses. In 2006, employees were limited to receiving no more than $105 per month in passes.

The problem is that some people are apparently pocketing the tax-free contribution to their annual income and then getting in their car and hitting the Shirley road or some other major commuter route and driving into town. No doubt, the tax-free income enables them to help pay the cost of parking in the crowded metropolitan area.

But what good is a metro card if you aren’t using it and don’t just get the cold, hard cash in your hand?

Not much. But, with the marvel of the internet and excellent sites such as eBay where one can sell just about anything of value, a metro card is almost as good as cash. In effect, some federal employees set up a money laundering operation. The government gives out a card that has a value in services of as much as $105 in a month. Of course, a DC resident who actually wants to ride the subway won’t pay full value for the card. If they were going to do that, why bother going to the internet to get a good deal. To make it worthwhile, the errant feds sold their tax-free cards at a discount.

The commuter who can’t afford to drive a car to work and pay for parking gets a discount to ride public transportation, the federal employee gets the cash benefit.

Remember Al Capone?

The feds caught up with Al Capone, the notorious gangster from another era, not for some of the various crimes that were resulting in death and mayhem in Chicago streets, but for income tax evasion. If you are a reader of this article, and you are one of those who has been selling your metro card on the internet, here is an interesting question.

While the metro card legally gives you a tax-free benefit, what about the cash that you receive from selling the card? Did you report the money as income on your federal tax return? You may want to check with your tax advisor. Are you obligated to report the money you got from eBay as extra income and will be required to pay a tax on that money?

I am not a tax expert by any means. But, in a small footnote, the GAO report inserts a sentence that should interest some people: "[T]transit benefits used for commuting purposes by the intended recipient are tax free. However, income derived from the sale of transit benefits would be considered taxable income; sellers would be required to report these sales as part of their gross income. Moreover, the reports says that "none of the 13 individuals we interviewed reported income earned from Metrochek sales on their federal tax returns."

The Treasury Department is one of the agencies investigated by the GAO with regard to the sale of the metro cards. The agency should be able to determine which employees received the cards; GAO has the names of some of the employees who were selling the cards for cash on the internet; and the IRS computers could presumably check for any matches that may exist. When I worked for the Treasury Department a number of years ago, we were advised to be honest and forthright when paying our taxes because the agency would routinely audit employees to ensure the agency was maintaining the integrity it needed to maintain the confidence of the public. I probably paid more than necessary just to avoid problems and because the warning had the desired impact.

Moreover, the GAO has taken the trouble to note that a GS-14 information technology specialist at the IRS drove to work, parked for free in agency provided parking, and was still able to collect $105 per month in transit benefits – most of which he sold on eBay. If the agency did decide to investigate further and take some action, the extra cash probably does not look like a good deal anymore to someone who may have put his federal career at risk for a very limited financial gain. Perhaps the agency no longer gives out the warning to employees about paying taxes and maintaining the integrity of the agency.

Will the agency take the time and trouble to check the different lists? I have no idea if the agency even cares about giving out the cards and employees then selling them on the internet. The union that represents many Treasury Department employees prefers to emphasize the benefits of the program and was quoted in news reports that the union is concerned about possible fraud but that the Metrochek program "fills a number of vital needs, including helping federal workers with their commuting costs and assisting in efforts to reduce the amount of traffic.”

The reaction of some people who may have been involved in selling the free transit passes is probably predictable. One unidentified reader posted a note on the internet that read, in part, "When I changed to the Department of Labor, I was told that the subsidy for commuting from Point A to Point C, was a fixed amount, with no allowance for holidays, months with more work days than usual, or leave. When you are treated like an idiot that can’t be trusted, there is no incentive to be honest with this program."

While there is no way to accurately measure the ethics or honesty of a group as large as federal employees, the conclusion that there is "no incentive to be honest with this program" is not entirely correct. It isn’t just the tax consequences. The employees making a few extra bucks could be subject to prosecution for unlawful conversion under 18 U.S.C. §641. In addition, because the employees investigated by GAO signed certifications stating that they will only use their transit benefits to cover actual out-of-pocket commuting costs, they could be subject to criminal prosecution under the False Statements Act, 18 U.S.C. §1001. That, at least, is the conclusion of the GAO report.

No doubt there will be an argument that no one should be prosecuted because the people cashing in the cards did not know they were doing anything wrong. In fact, some of those selling their cards on the internet have already told GAO they never signed any certifications about limits on their use of the cards.

That may be the result of selective amnesia. One type of card reads: "Metrocheks may be used or exchanged for WMATA or non-WMATA fares only by the person to whom it is validly issued. Only employers or WMATA-approved agents may issue valid Metrocheks and only directly to qualified employees. The use, sale, or exchange of Metrocheks by any other person makes the Metrochek invalid, and is therefore, illegal and subjects the person to arrest and/or prosecution."

Having paid for my own parking in downtown Washington, DC for more than a decade, I would be thankful for the benefit of being able to ride the subway and getting it paid for. If I were still a federal employee collecting this new benefit, I would be mad at my colleagues that are putting the entire program at risk so they could supplement their annual federal salary for an extra few hundred dollars.

Most federal employees will be reticent and probably part of a "silent majority". If there are prosecutions as a result of this report, it is not hard to predict there will be publicity about the appeals. The miscreants will have unions and attorneys representing them and explaining to the public why they were not aware it was wrong to drive to work and sell the cards for cash. The public will read about the GAO report, they will read about the appeals of employees trying to evade punishment and will conclude the federal workforce is filled with unethical people out to make extra money while the "average" federal employee in the Washington metro area is making about $89,000 per year.

In short, while it may be that "there is no incentive to be honest with this program," some federal employees are going to harm the reputation of the federal workforce.


About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47