Audit Report on the Department of Finance Oversight of the Industrial and Commercial Incentive Program

AUDIT REPORT IN BRIEF

We performed an audit of the Department of Finance’s (Department) oversight of the Industrial and Commercial Incentive Program. The program was created by Local Law 71 on November 5, 1984, as authorized by the New York State Real Property Tax Law (Title 2-D). Under the program, the Department offers property tax exemptions and abatements to qualified property owners. A tax exemption is a reduction in the assessed value of a property; an abatement is a credit against the tax due. According to the Rules of the City of New York (Rules), to obtain an exemption or abatement, applicants must perform eligible construction work by making permanent capital improvements that create or enhance the value of a property. In addition, applicants must, within specific time periods, make a "minimum required expenditure" in carrying out the eligible improvements.

Audit Findings and Conclusions

The Department properly calculates the amount of individual exemptions. However, there are significant weaknesses in the administration of the program. Specifically, the Department does not have adequate internal controls to ensure that it properly reviews and approves applications for program exemptions and abatements and does so in a timely manner. As a result, the Department approved applications for applicants who did not adhere to the Rules governing the program. Applicants did not submit documentation when required, and Department files did not contain all necessary documentation to indicate whether applicants had fulfilled various program requirements. In addition, the Department improperly granted certificates-of-eligibility to owners of 11 of the 66 applications reviewed. Additionally, the Department does not have adequate procedures to complete inspections in a timely manner to ensure that improvement work does not start before an applicant submits a preliminary application.

Moreover, the Department does not effectively administer the program to ensure on an annual basis that applicants remain eligible for program benefits. The Department did not suspend or adjust program benefits for properties whose use changed, thereby becoming ineligible for benefits. In addition, if the Department allows these properties to remain in the program, the City will forgo taxes on these properties in future years. Finally, the Department did not suspend program benefits for properties for which required certifications of continuing use were not submitted. As a result of these weaknesses, the City failed to collect $2,527,013 for the properties in our sample, and will forgo in future years tax revenue totaling at least $1,429,998.

Finally, the Department databases containing information about program applications are unreliable.

Audit Recommendations

This report makes a total of 20 recommendations. The major recommendations are as follows:

The Department should:

• Prepare formal written policies and procedures that comply with program Rules that cover program guidelines, that stipulate timetables for reviewing applications, and that levy penalties for failure to submit documentation.

• Record and properly maintain all supporting documentation in Department files.

• Enforce the provisions of the Rules governing the program on a consistent basis.

• Ensure that only improvement work eligible under the Rules be qualified to fulfill minimum required expenditure amounts; and assign and instruct appropriate personnel to review and analyze work descriptions in applications to determine whether work is eligible for program benefits.

• Ensure that certificates are submitted annually for all properties. In the event that certificates are not submitted, the Department should suspend program benefits for those properties.

• Conduct a thorough review of an applicant’s certificate-of-continuing-use, the inspection report, and other supporting documentation to determine whether a property remains eligible for program benefits.

• Conduct inspections of properties receiving ongoing benefits to verify that the property’s use has not been converted to an ineligible use. Suspend or revoke benefits to properties that do not comply with program requirements regarding continuing use.

• Establish procedures to effectively administer the program and ensure that applicants are entitled to continue receiving program benefits.

• Suspend or revoke benefits when property owners do not comply with continuing-use requirements.