Audit Report On The Granting Of Tax Abatements By The Department Of Finance Under Industrial And Commercial Incentive Program

AUDIT REPORT IN BRIEF

We performed an audit on the granting of tax abatements by the Department of Finance (Department) under 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 improperly granted tax abatements to owners of 128 properties. These abatements were granted even though the work on which they were predicated did not merit a tax exemption, and the improvements made to these properties did not result in physical increases to the properties’ assessed values. As a result of granting these abatements, the Department did not collect $8,063,047 in taxes on these properties for Tax Years 1996/1997 to 2003/2004. Moreover, since the abatements granted under this program extend over a 12-year period, the Department will forgo approximately $5,717,831 in additional property taxes on the properties in future years.

Our review of file documentation for the 128 properties that received abatements indicated that in seven cases, there was no evidence that work was performed at all. In another 68 of these cases, notwithstanding the fact that the properties’ assessed values did not increase, the Department granted abatements for repair or replacement work even though the Rules provide that “ordinary repairs, replacements, or redecoration” do not qualify for abatements. In addition, our review indicated that 36 of the 128 cases that received abatements involved various upgrades to the properties that in our opinion fall short of the Rules requirement of a “substantial renovation.” In contrast to the above-mentioned 75 cases for which work was for repairs or replacements or was not done, the files for these 36 cases did not indicate that the work involved repairs or replacements, nor did they contain evidence that substantial renovation work was performed. For the remaining 17 cases that had no increase in assessed value, the file documentation was insufficient for us to accurately evaluate the nature of the work involved.

The Department was unable to provide written policies or guidelines documenting its reasons for considering these types of projects to be eligible for abatements in contradiction of the Rules that govern the program. Department officials told us that its informal policy, based on its interpretation of the legislation, was to grant abatements to applicants who spend the equivalent of the required 25 percent minimum required expenditure for work that is a permanent, capital improvement with a useful life of at least three years, even if the property’s assessed value is not increased. However, the Department’s disregard of the current Rules governing the program along with its failure to promulgate new Rules or other publicly available standards for evaluating work before granting abatements leaves the program susceptible to fraud and abuse.

Audit Recommendations

This report makes a total of four recommendations, as follows:

The Department should:

• Immediately discontinue its practice of granting tax abatements to properties for which improvement work is only “ordinary repairs, replacement or redecoration” or does not include a substantial renovation, and does not increase their assessed values.
• Review and reconcile Department records to identify which properties received abatements without achieving an increase in assessed value. For those properties that are not entitled to abatements, the Department should revoke the incorrectly granted abatement benefits and recoup the improperly abated taxes.
• Assign appropriate personnel to review and analyze work descriptions in applications to determine whether the work is indeed eligible for program benefits.
• Prepare and adopt formal written policies and guidelines for granting abatements that conform to program Rules.

Department officials stated that property owners are required to submit annual financial statements of reported net income. The amount of net income could affect a property’s assessed value, thereby reducing or increasing the amount of property taxes.