Audit Report on the New York City Department of Finance’s Administration of the School Tax Relief Program

EXECUTIVE SUMMARY

This audit of the New York City Department of Finance (DOF) focuses on its administration of tax benefits to qualified property owners under the New York State School Tax Relief Program.  The program provides a partial exemption from school taxes for owner-occupied primary residences.  There are two types of School Tax Relief exemptions: a homeowner may obtain either a Basic School Tax Relief exemption (STAR), or an Enhanced School Tax Relief exemption (ESTAR) available to homeowners who are 65 or older by the end of the calendar year in which the exemption begins. However, homeowners cannot receive both.  There is no age restriction for the STAR exemption, but the combined income of resident owners and their spouses cannot be more than $500,000.  Only individuals, not corporate entities can claim STAR and ESTAR exemptions.¹  For the ESTAR exemption the combined income of resident owners cannot be more than $81,900 for Fiscal Year 2015 (July 1, 2014 to June 30, 2015). STAR and ESTAR are governed by Section 425 of the New York State Real Property Tax Law (RPTL).

According to DOF’s Standard Operating Procedures Personal Exemptions Processing an Application, applications and supporting documentation must be reviewed to determine whether the homeowners meet the STAR and ESTAR exemptions’ eligibility requirements.  The exemptions are then entered into DOF’s mainframe system called Real Property Assessment Data (RPAD).  As of July 1, 2014, there were 491,149 homeowners who received either the STAR or ESTAR exemption.

Audit Findings and Conclusion

DOF allowed owners of at least 1,500 properties to receive STAR or ESTAR exemptions for which they were not eligible.  Specifically, DOF failed to remove exemptions for at least 1,355 properties when ownerships were transferred to a corporation or a limited liability company (LLC).  We also found another 154 properties that are not classified by DOF for residential use that received STAR or ESTAR exemptions.  Consequently, these 1,509 property owners may have received tax reductions to which they were not entitled and as a result, the government might have failed to receive $422,520 in property tax revenue during Fiscal Year 2015 to which it was entitled.  Moreover, these property owners could have received additional tax reductions from the STAR exemption for years prior to Fiscal Year 2015.  Further, DOF failed to properly maintain the STAR exemption application and supporting documentation for 26 of the 50 sampled cases.

Audit Recommendations

DOF should:

• Verify the ownership of the 1,355 properties that, according to the DOF 2015 Final Assessment Roll, are owned by either a corporation or an LLC, and remove the STAR or ESTAR exemptions from those properties that are determined to be owned by a corporation or an LLC.
• Review all properties with a non-residential building class that are currently receiving STAR or ESTAR exemptions to ensure those properties are qualified for the exemption.
• Request updated information from the owners of the properties identified in this report as missing documentation and review their eligibility for the STAR and ESTAR exemptions they have been receiving.
• Ensure all future applications are properly stored in DOF’s data management system.
• Implement tighter controls to ensure that the homeowner information listed in RPAD is accurate and up to date to prevent a homeowner from receiving STAR or ESTAR exemptions on multiple properties.
• Modify RPAD to contain computer edit checks that will automatically:
  • Reject STAR and ESTAR exemptions for properties that are owned by corporations and LLCs;
  • Ensure that STAR and ESTAR exemptions are removed from a property when the title to a property is transferred to a new owner; and
  • Reject applicants for a second STAR exemption who already have one.

Agency Response

DOF officials agreed with the audit’s recommendations and stated that “DOF is already in the process of undertaking the steps recommended to ensure renewals are being completed and case files are being maintained. We will continue to diligently review applications and supporting documents to ensure applicant eligibility.”