Audit Report on the New York City Department of Finance’s Collection of Real Property Transfer Tax and New Real Estate Taxes

September 20, 2019 | FM18-093A

Table of Contents

    Executive Summary

    The New York City (the City) Department of Finance (DOF) is responsible for administering the City’s tax and revenue laws.  For Fiscal Year 2018, it reported collecting approximately $39 billion in revenue and valued more than one million properties worth a total market value of more than $1 trillion.  Among its taxing responsibilities, DOF is charged with collecting Real Property Transfer Tax (RPTT), billing and collecting Real Estate Tax (RET), administering property tax exemption and abatement programs, and maintaining public property records related to real property ownership.

    For Fiscal Years 2016 and 2017, the City reported $1,788,182,063 and $1,418,683,372 in RPTT revenue, respectively, related to the approximately 159,000 recorded transfers for 173,000 properties and 42,000 non-recorded transfers for 51,000 properties in all five boroughs.  Of the total RPTT collected in connection with commercial transactions greater than $500,000, 38.095 percent of the RPTT collected goes to a special fund for the Metropolitan Transportation Authority (MTA).[1]

    In general, RET is imposed on real property in all five boroughs based on a property’s assessed value and the current tax rate, taking any real estate tax exemptions that the property might be entitled to into account.[2]  When a property is transferred from a tax exempt entity (such as a governmental entity or a not-for-profit organization) to a non-tax exempt entity, DOF is responsible not only for collecting any RPTT due as a result of the transfer, but also for removing all real estate tax exemptions based on the grantor’s eligibility at the time of transfer and placing the property back onto the tax roll.  Similarly, when an exempt owner leases or uses a property for non-exempt purposes, all tax exemptions that are not applicable to the new owner or as a result of a non-eligible use should also be removed and the RET should be restored.

    Audit Findings and Conclusion

    Overall, we found that DOF’s examination process for RPTT returns is limited and as a result, it cannot be reasonably assured that the returns are facially complete or sufficient, that taxpayers are providing all required documentation with their RPTT returns, and that the City is collecting the full amount of RPTT due and owed.  Further, we found that DOF’s policies and procedures related to the submission and review of RPTT returns were inconsistent, incomplete, and contained instructions for DOF employees that were contradicted by various DOF officials.  These weaknesses increase the risk that the work of DOF’s Examiners charged with conducting a facial review of the returns will be ineffective and that the full amount of RPTT due will not be collected.

    The scope and purpose of DOF’s review of RPTT returns was described in various ways in different written DOF procedures and in explanations provided by DOF officials to the auditors.  However, at an exit conference at which our preliminary findings were reviewed, a senior DOF official who has signed off on many of the written procedures stated that DOF Examiners are responsible solely for checking for the presence of four items when they receive RPTT returns: (1) that the grantor and grantee information is provided; (2) that the returns are signed; (3) that the signatures are notarized; and (4) that a tax was paid.  DOF officials maintained that DOF has not instituted a process whereby the Examiners review the submission of related documents to ensure that all additional necessary documentation is submitted with the returns or that the correct amount of taxes are paid.

    Because DOF does not require that steps be taken as part of its examination processes to ensure that the RPTT returns are facially correct or sufficient, and that the documentation taxpayers are required to file with their RPTT returns is in fact filed, DOF has not established adequate written policies and procedures for managing its receipt and review of RPTT returns and did not provide adequate training to and oversight of its examination staff.  In addition, we found that a defect in ACRIS resulted in incorrect RPTT assessments being made.  As a result of DOF’s limited review and control weaknesses, in our sample of 179 RPTT returns, we identified approximately $620,000 in potentially uncollected RPTT.  Thus, we do not have reasonable assurance that DOF properly reviews RPTT returns and collects the full amount of RPTT due.

    We also found that, based on the RPTT reported as due and paid, DOF did properly calculate the portion allocable to the MTA.  Accordingly, based on the amount of RPTT collected, the full amount due to the MTA was remitted by DOF to the New York City Transit (NYCT) and New York City Department of Transportation (DOT).

    With regard to the RET, we found weaknesses in DOF’s billing and collection of that tax in situations where a change in property use or ownership should result in the revocation of an exemption, such as a property transferred from an exempt to a non-exempt party.[3]  We determined that for 26 of the transfers included in our audit sample, the RET was not appropriately applied, resulting in over $2 million in uncollected taxes.

    DOF’s failure to institute sufficient controls over its RPTT and RET operations significantly increases the risk of inadequate collection and potential loss of City revenue and of funds due to the MTA.

    Audit Recommendations

    To address the issues raised by this audit, we make seven recommendations as follows:

    • DOF should revise its written procedures for Examiners to follow and should provide instructions for conducting RPTT reviews that are consistent with the instructions provided to RPTT filers with the returns and with the City’s rules and regulations. Such revised written procedures should include detailed steps the Examiners should take when reviewing the returns and the related documents that should accompany the returns in every situation and be consistently applied for all five boroughs.
    • DOF should provide adequate RPTT training for Examiners and Supervisors to ensure that RPTT related documentation is reviewed properly and consistently.
    • DOF should review ACRIS’ functionality to ensure that manual overrides can be made by tax filers only in permissible circumstances.
    • DOF should consider expanding ACRIS’ functionality to automatically identify and require the submissions of all the related documents DOF’s RPTT return instructions direct taxpayers to submit with their RPTT returns and to further automatically identify the “suspected documents” to preempt incomplete submissions.
    • DOF should consider upgrading its computer system to automatically impose RET from the date of the transfer that removes the exemption or otherwise effectively implement the requirement that taxpayers pay the full RET starting from the date a property changes from exempt to non-exempt, including by, as needed, revising policies and procedures to detail the requirements related to the billings for the unexpired portion of the billing cycle.
    • DOF should conduct unannounced site visits to ensure that properties are used for exempt purposes only.
    • DOF should retroactively bill and collect from the owners the $2,096,701 under billed RET.

    Agency Response

    In its response, DOF agreed with three of the audit’s seven recommendations.  For the remaining four recommendations, DOF partially agreed with three and disagreed with one.  Among other things, DOF specifically agreed that the examiners should ensure that supporting documents, if required, are attached in order for RPTT returns to be filed; that DOF should provide adequate training to ensure that all examiners and supervisors are properly and consistently reviewing and accepting the related documentation in accordance with the RPTT instructions; and that ACRIS should have functionality that enables it to automatically identify and require submission of most of the related documents, and claims that the system already has such functionality.  At the same time, DOF maintains that “supporting documentation is used only for auditing the returns.  The examiners are not auditors, and if the returns meet the criteria for acceptance at the time of recording, they cannot reject the return and thereby delay the recording of the document, the filing of the return, and the posting of the taxes.”

    Endnotes

    [1] Commercial transactions are the transfers related to properties other than the residential properties (one-, two- or three-family homes, individual residential condominium units or individual cooperative apartments).

    [2] A property’s assessed value is a percentage of its market value as determined by DOF and is based on its tax class.  Property in New York City is divided into four tax classes.  Tax Class 1 includes one- to three-unit residential properties; Tax Class 2 includes residential property with more than three units including cooperatives and condominiums; Tax Class 3 includes utility company equipment and special franchise property; and Tax Class 4 includes all other real property, including office buildings, factories, stores, hotels and lofts.

    [3] A transfer from an exempt to a non-exempt party can be a sale or lease of the property.

    $242 billion
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    2022