Audit Report on the New York City Department of Finance’s Administration of the Veterans’ Exemption Programs

Executive summary

This audit of the New York City Department of Finance (DOF) concerns its administration of tax benefits granted to property owners under the Veterans’ Exemption Programs, which provide a partial property tax exemption for veterans, the spouse or widow/widower of a veteran who has not remarried, or parents of a soldier killed in action.  The Veterans’ Exemption appears as a reduction of the assessed value of the property, which is used to determine the property tax.

Two categories of Veterans’ Exemptions are in effect in New York City: (1) the Eligible Funds Exemption, which was issued to eligible homeowners prior to 1984; and (2) the Alternative Veterans’ Exemption, which has been in effect since 1984.  The Eligible Funds Exemption, originally enacted in 1897, is codified in New York State Real Property Tax Law (RPTL) Section 458.  The Alternative Veterans’ Exemption is codified in RPTL Section 458-a.  Both exemptions require proof of ownership.  The Alternative Veterans’ Exemption has a primary residence requirement that is not required for the earlier enacted Eligible Funds Exemption.

Audit Findings and Conclusion

 DOF improperly credited Veterans’ Exemptions to 1,503 properties, which resulted in a loss to the City of at least $3,770,350 in forgone property tax revenue.

• DOF failed to remove Veterans’ Exemptions from 740 ineligible properties that were transferred to owners who were not authorized recipients of the exemptions, which resulted in the loss of at least $1,654,869.
• DOF failed to remove Veterans’ Exemptions from at least 341 properties after the eligible homeowners died, which resulted in the loss of at least $798,346.
• DOF also failed to correctly prorate the Veterans’ Exemptions for 200 properties that contain four or more units, which resulted in the loss of at least $915,173.
• DOF allowed at least 60 properties owned by ineligible corporations or limited liability companies (LLCs) to receive inappropriate Veterans’ Exemptions, which resulted in the loss of at least $165,219.
• DOF allowed 162 homeowners to receive multiple Veterans’ Exemptions simultaneously, which is not allowed and resulted in the loss of $236,743.
• DOF inappropriately approved (School Tax Relief Program) STAR exemptions for properties of deceased homeowners and ineligible corporations and LLCs, which resulted in the loss of $449,758. Thus, this audit identified $4,220,108 in lost tax revenue.

In addition, we question whether it was appropriate for DOF to apply Veterans’ Exemptions and resulting tax reductions totaling $1,804,979 to 456 cooperative properties and 115 other properties after the eligible veteran’s death where no other eligible owner was identified in DOF’s records.  In those cases, no deeds or other secondary documents were available in DOF’s records that could be reviewed to determine whether the subsequent owners of the property were eligible for the continuing exemptions.

Audit Recommendations

Based on the audit findings, we make the following 18 recommendations:

• Remove Veterans’ Exemptions from properties that were transferred from eligible to ineligible owners, retroactive to the date of transfer.
• Implement adequate controls to remove Veterans’ Exemptions retroactive to the date of transfer when properties are transferred to new owners who do not demonstrate eligibility in response to DOF’s notification letters.
• Recover the $1,654,869 in unwarranted tax reductions that resulted from the improper continuation of Veterans’ Exemptions after the properties were transferred to new, presumptively-ineligible owners.
• Verify whether homeowners eligible for Veterans’ Exemptions are deceased as reported by the Social Security Administration (SSA) and this audit report, and determine whether the current property owners are eligible for the exemption as qualified recipients. Where the current owners are determined to be ineligible, remove the Veterans’ Exemptions from applicable properties retroactively to the date of the eligible homeowner’s death.
• Implement adequate controls to remove the exemptions from properties whose eligible owners are deceased, retroactive to the date of death.
• Recover the $798,346 in unwarranted tax reductions that resulted from the improper continuation of Veterans’ Exemptions after the qualifying homeowners died.
• Verify whether homeowners eligible for STAR exemptions are deceased as reported by the SSA and this audit report, and determine whether the current property owners are eligible for the exemption. Where the current owners are determined to be ineligible, remove the STAR exemptions from applicable properties retroactively to the date of the eligible homeowner’s death and recover the $368,146 in unwarranted tax reductions.
• Investigate whether the 456 cooperative units and 115 other properties that have continued to receive Veterans’ Exemptions following the death of the eligible veteran-homeowner are currently owned by eligible individuals.
• Recover any and all of the $1,804,979 in questionable tax reductions on 456 cooperative units and 115 other properties that resulted from any improper continuation of Veterans’ Exemptions after the qualifying veterans died, where DOF determines that there are no other qualified recipients.
• Appropriately prorate the exemption calculations on properties with four or more units that resulted from the failure to properly calculate and limit such exemptions to the eligible owner’s primary residence.
• Implement adequate controls to ensure that Veterans’ Exemptions claimed for properties containing four or more units are prorated and limited to the owner’s primary residence unit.
• Recover the $915,173 in unwarranted tax reductions that were improperly granted to properties containing four or more units.
• Remove the unwarranted Veterans’ Exemptions from properties that, according to deeds recorded in DOF’s Automated City Register Information System (ACRIS), are owned by either corporations or LLCs.
• Implement adequate controls to prevent a property owned by a corporation or LLC from receiving the exemption.
• Recover the $246,831 in unwarranted tax reductions based on the improper application of Veterans’ Exemptions and STAR exemptions to properties owned by corporations or LLCs.
• Verify ownership of 162 properties that DOF records show are improperly receiving compounded or multiple Veterans’ Exemptions and remove all improperly applied exemptions.
• Recover the $236,743 in unwarranted tax reductions that resulted from the incorrect application of multiple Veterans’ Exemptions to individual owners.
• Modify the Real Property Assessment Data system to contain computer edit checks that will automatically:
  • Reject the Veterans’ Exemptions for properties that are owned by corporations and LLCs;
  • Prorate the Veterans’ Exemptions for properties that contain more than four units; and
  • Reject multiple Veterans’ Exemptions for any property owned by an individual veteran or other eligible owner. List the full names of all veterans receiving the Veterans’ Exemption for each property.

Agency Response

In its audit response, DOF agreed with most of the audit recommendations and indicated that it would address the issues raised.  DOF acknowledged that for more than a decade it failed to remove the Veterans’ Exemptions from properties that were no longer owned by eligible veterans who may have sold the properties or died, and that it did not regularly determine whether the properties receiving Veterans’ Exemptions remained eligible for them.  DOF’s response thus confirms what is detailed in this report—that DOF has inappropriately allowed Veterans’ and STAR Exemptions to continue without review for years resulting in the City’s losing millions of dollars in forgone property tax revenue to ineligible owners.  However, DOF stated that it would not retroactively remove exemptions from ineligible properties because “owners may not have been knowledgeable or may have been confused about the tax benefit on the properties they owned.  DOF does not intend to punish those potentially ‘innocent’ owners.”  (Emphasis added.)  Thus, DOF has determined that it will not seek to recover much of the revenue that it acknowledges has been lost.