Glen Stubbe/Star Tribune file
MMB Commissioner Myron Frans in a response included with the report said his agency has developed new procedures to prevent the accidental purchase of state debt by state agencies.

Minnesota's budget agency has implemented new safeguards to prevent future federal tax violations and to improve transparency after the office failed to widely disclose penalties paid to the Internal Revenue Service.

A report released Thursday by the legislative auditor found that the Minnesota Management and Budget (MMB) office should have discussed with auditors whether to disclose a $537,000 tax settlement paid to the IRS. The penalty was for the purchase of state bonds in 2010 and 2011 by the state investment board, a violation of federal tax rules. Budget officials noticed the transactions in 2012 and reported them to federal tax authorities.

The payment and lack of disclosure were first reported by the Star Tribune.

"We concluded the violations and resulting settlement were significant enough, based on qualitative considerations, to warrant disclosure in the notes, since the municipal bond community … are primary users of the state's financial statements," the report by Legislative Auditor Jim Nobles said.

MMB Commissioner Myron Frans in a response included with the report said his agency has developed new procedures to prevent the accidental purchase of state debt by state agencies. State agencies will be required to certify that they did not purchase state bonds, and MMB will also notify legislators and others when penalties or other uncommon payments are made from the state's general fund.

"We continue to place a high emphasis on ensuring that our notes to the financial statements present all required disclosures," Frans wrote.

Frans in his response said such a disclosure is not typically included unless the terms of a settlement require one or if there are other legal obligations for disclosure.

"Based on input from bond counsel, financial advisers and industry best practices, we concluded the settlement with the IRS was not a required disclosure in the notes to the financial statements," Frans said.

Ricardo Lopez • 651-925-5044