Sources close to a months-long federal investigation involving the Hamilton County trustee's office say the county for years has mishandled payments made toward delinquent property taxes by those who are in Chapter 13 bankruptcy.
The careless accounting practices, in which the county allegedly failed to give credit for partial payments, sometimes meant local government received more than it legally was owed from property owners already in financial distress, the sources said.
In other cases, property owners in bankruptcy also were charged interest penalties for late or unpaid taxes, even though their bankrupt status should have shielded them from such penalties.
The government officials spoke on the condition of anonymity because policy forbids them from talking about ongoing investigations.
This week, the U.S. attorney's office subpoenaed County Trustee Carl Levi to turn over documents amid concerns that current changes to the trustee's computer software would destroy records that point to the alleged accounting discrepancies.
Roger Dickson, the attorney for the trustee's office, acknowledged the investigation Friday, saying the county has agreed to keep all records intact and will work to correct any problems.
Mr. Dickson said any errors were unintentional and attributed the problems to computer software that doesn't recognize special exceptions for bankrupt property owners.
In addition to being exempt from interest penalties, those who file for Chapter 13 are legally entitled to make monthly payments for back taxes. Other Hamilton County property owners are required to pay the full tax bill in one lump sum.
"We're trying to make sure our records-keeping system will correctly handle (in the future) property taxpayers who are in bankruptcy," Mr. Dickson said.
Mr. Dickson said he could not comment on the possibility of refunds.
The federal sources could not say how many property owners are affected. Records still are being examined, they said.
The local U.S. bankruptcy trustee's office on Friday declined to answer questions about the investigation.
Mr. Levi on Friday admitted the investigation started seven months ago when federal bankruptcy officials began noticing apparent problems. He said local bankruptcy officials "just didn't like the way we were doing things."
He shrugged off questions about property taxpayers in bankruptcy and also said he really has "no idea" what the whole thing is about.
"The way we've been doing things in the trustee's office is the way we've been doing it for years," Mr. Levi said.
He said he and his staff have worked even "on weekends" trying to make bankruptcy officials happy.
"We've tried to make our system the way the U.S. bankruptcy trustee wants," Mr. Levi said.
Mr. Levi, 79, has worked in local government for more than 50 years, including 24 years as Chattanooga city treasurer. He was elected trustee in 2002, but lost to County Commissioner Bill Hullander in the May Republican primary.
Since there is no Democratic candidate in the Aug. 5 election, Mr. Hullander will take over as county trustee on Sept. 1.
Mr. Hullander on Friday declined to comment on the investigation.
"If there is a problem, I'll try to take care of it and make it right," he said.