The District didn't collect $6.5 million in tax penalties because its chief financial officer refused to enforce a D.C. law tied to electronic-filing requirements for certain businesses, the city's inspector general has found.

Businesses facing a tax tab of more than $10,000 are required to file returns and pay electronically, and violators are subject to a penalty equal to 10 percent of their outstanding bill.

But Inspector General Charles Willoughby said the D.C. Office of Tax and Revenue, which CFO Natwar Gandhi oversees, did not order businesses to pay penalties during a five-and-a-half-year span he reviewed.

Tougher rules
Until 2010, D.C. businesses weren't required to file their tax returns electronically unless they owed $25,000 or more. A 2009 law adjusted the threshold to $10,000.

"OTR has neither assessed the penalty specified in the regulation nor enforced compliance with the criteria," Willoughby said in a report. "OTR failed to collect at least $6.5 million in penalty revenue as a result of not enforcing the 10 percent penalty for noncompliance."

Ward 3 Councilwoman Mary Cheh, who said $6.5 million in lost income had "real consequences for people and their needs," criticized Gandhi.

"It's another disappointment, another loss of money, and there will be no getting it back," Cheh said. "It's very frustrating."

But Ward 2 Councilman Jack Evans offered support for Gandhi.

"If we should have collected it, then we should collect it," Evans said. "But in general, Gandhi's office has been very aggressive on collecting taxes."

During the period that Willoughby's investigators examined, Gandhi's office used more than 31,000 "formal notification letters" to encourage businesses to pay electronically.

Although the office pressed companies to adjust their taxpaying practices, its employees later told investigators that they lacked the authority to sanction businesses that ignored their directives.

David Umansky, Gandhi's spokesman, stood by that assertion on Monday.

"The Office of Tax and Revenue collects penalties only if there is statutory authority to do so," Umansky said. "Although regulations were adopted, the necessary statutory authority was never adopted. The authorizing legislation requiring electronic payment of this tax does not include language authorizing the collection of penalties."

Willoughby's office contended that a municipal regulation is sufficient for Gandhi to levy the penalty.

Gandhi's office has been accused in the past of neglecting to pursue millions of dollars owed to the city.

The CFO was the target of criticism last year after his office acknowledged its practice of reaching settlements with commercial property owners about the values of their real estate holdings, deals that typically resulted in lower tax burdens.

And in 2011, the office came under fire amid charges that it did not properly manage the city's deed recordation tax.

"There is a history here," Cheh said. "We've had go-rounds with him on things that he's not collected or his strange interpretation of the law. ... It doesn't give me the most secure feeling."