THOMPSON: CITY INCORRECTLY CALCULATES NEARLY 100 PERCENT OF TAX EXEMPTIONS ON MANHATTAN PROPERTIES, SUFFERING LOSS OF MILLIONS
- New audit finds 421(a) program allows many property owners to avoid millions in real estate taxes -
The Department of Finance has inaccurately calculated tax benefits for properties under its Section 421(a) program, which will ultimately costing the City more than one hundred million dollars in real estate tax revenues, a new audit by New York City Comptroller William C. Thompson, Jr. has found.
Thompson's audit determined that the Department of Finance (DOF) incorrectly calculated the taxable assessed value of 48 out of 50 - or 96% - of sampled properties in Manhattan currently receiving 421(a) tax exemption benefits.
"The Department of Finance must immediately correct these inaccuracies so the City does not allow at least $130 million to slip through its fingers," Thompson said. "The City's resistance to rectifying this represents financial hypocrisy at its worst; on the one hand claiming that agencies must tighten their belts amid the lingering recession while permitting a faulty process that costs taxpayers, to continue."
"It is disturbing that an agency charged with collecting taxes is making such costly mistakes," said City Councilman and Finance Committee Chair David Weprin. "As a result of these errors, we are losing millions of dollars precisely when the City most needs the revenue. This is not acceptable and DOF should make all necessary corrections immediately. I will add that, for more than a year now, the Council has grappled with cuts to vital city programs and services. It frustrates me to learn that, had these millions of dollars not been lost, those looking out for the public interest could have saved just one more public program."
Thompson's audit - available at www.comptroller.nyc.gov -found that:
- The DOF incorrectly calculated the taxable value of 48 of 50 sampled properties in accordance with its own methodology.
- As a result, the City did not collect $9,896,149 in real estate tax revenue for 37 sampled properties.
- For 11 properties, the DOF collected excess tax revenue totaling $1,239,558.
- As a result, the City did not collect $9,896,149 in real estate tax revenue for 37 sampled properties.
- More than $5 million in additional real estate taxes were lost due to improper exemptions.
- If DOF continues to under-bill and over-assess these 48 properties, the City will lose $130.2 million in additional taxes throughout the remaining terms of the exemption benefits.
- The DOF has significant problems with regard to its administration of the 421(a) program, including: inconsistent program records, no written procedures for calculating tax information, and a lack of required documentation for exempt properties.
The Section 421(a) program provides tax exemption benefits to owners of residential real estate property who construct new multiple dwellings or convert, alter, or improve existing buildings for residential use. The Department of Housing Preservation and Development is responsible for administering the program and issuing a certificate-of-eligibility to property owners who meet program requirements. The Department of Finance is then responsible for calculating and implementing tax benefits granted under the program.
A property owner must submit a certificate-of-eligibility to the DOF in order to obtain a tax exemption. The Department's Commercial Exemptions Unit oversees the program and records information about a property's tax status in an information technology application known as FAIRTAX.
The program was created in 1971 under legislation authorized by Section 421(a) of the New York State Real Property Tax Law as a means of encouraging housing development in the City. Exemptions are granted for a period of up to three years for construction, and either 10, 15, 20, or 25 additional years on a sliding scale. In Fiscal Year 2009 alone, 37,485 properties received $607 million in tax benefits citywide
Thompson's audit utilized a sample of 50 properties in Manhattan currently receiving 421(a) tax benefits. As discussed above, Thompson's major finding was that the DOF is not appropriately implementing tax exemption benefits and calculating real estate taxes under the 421(a) program. Under the program, real estate taxes must be paid on a property's taxable assessed value, which is the assessed value less any exemption.
Thompson's staff scheduled a meeting with Department officials to resolve these discrepancies. However, the Department cancelled the meeting and never explained the disparate calculations.
"Using the Department's own calculation methods, we determined that the agency incorrectly calculated the taxable value of 48 of 50 sampled properties - or 96 percent," Thompson said. "Despite this alarming finding, the Department has refused to discuss these findings with my office for the purposes of this audit, which is simply inexcusable. The City must ensure that this program is administered correctly moving forward in order to minimize the fiscal impact of the Department's mistakes."
In addition to the problems identified by Thompson's audit, the report also identified specific problems with the implementation of benefits and calculation of tax exemptions for six of the sampled properties.
First, $4,849,389 in taxes was not collected for two properties that obtained exemptions although there was no evidence that the dwellings met the necessary 421(a) program requirements. Secondly, $442,010 in taxes was not collected for four properties that were receiving unrelated exemptions.
"As a result, more than $5 million in additional real estate taxes were lost," Thompson said. "The Department must cease providing benefits to properties that do not qualify for the 421(a) program."
Thompson's audit also identified several internal control problems with the manner in which DOF administers and calculates tax benefits under the program.
Thompson charged that certain program information recorded in FAIRTAX is inconsistent with the information in the manual property cards. As a result of these inconsistencies, the accuracy of FAIRTAX as a source for recording base year assessed values - a key element in ensuring that program exemptions are properly implemented - is uncertain.
"This problem further highlights the Department's inability to properly calculate and monitor taxable assessed values, exemptions, and taxes due the City," Thompson said.
Furthermore, DOF lacks written procedures for calculating program benefits and taxes, which are an important internal control for ensuring these calculations are carried out accurately and consistently. Finally, for the 50 sampled properties, 35 (70%) files lacked certain required documentation, such as preliminary and final certificates-of-eligibility.
"Maintaining these documents in the appropriate files is necessary for the Department to substantiate that a property is eligible to obtain benefits under the program," Thompson said.
As a result of the audit, Thompson made 10 recommendations, including that the DOF:
- Review and adjust the calculation of taxable assessed values and taxes due for the 50 sampled properties, and for all other properties.
- Recoup $9,896,149 in real estate taxes from 37 properties.
- Recoup $4,849,389 in improperly allowed real estate benefits for two properties.
- Adjust base year assessed value calculation for four properties as required by program rules and recoup $442,010 in lost real estate taxes.
- Implement adequate internal controls to ensure that all program information is accurately recorded in FAIRTAX and the hardcopy property files (e.g., property cards, etc.) In that regard, information in FAIRTAX and the property cards should be periodically reconciled.
- Prepare formal written policies and procedures for calculating assessed values and exemptions. Ensure that appropriate Department staff is instructed in program policies and procedures.