Audit Report on the New York City Department of Finance’s Restraint and Seizure of Payments to City Vendors with Tax Warrants

EXECUTIVE SUMMARY

The New York City Department of Finance (DOF) is responsible for the administration and collection of approximately $37 billion in City revenue, which includes a variety of business taxes.  During Fiscal Year 2017, DOF collected approximately $1.3 billion in what is identified as business and excise tax revenue.[1]   As the City’s tax collector and enforcer of the City’s tax laws, DOF is responsible for collecting taxes due from, among others, private contractors and vendors  that do business with the City (vendors), including some vendors that are delinquent in paying those taxes.  Under longstanding procedures, DOF can notify the vendors of their City tax debts, docket them as warrants and, after providing an additional notice, offset the docketed taxes the vendors owe to the City against the amounts the City owes to the vendors for the goods and services they provided.  This audit was conducted to determine whether DOF effectively restrains and seizes the payments due to City vendors with outstanding tax warrants.

DOF’s Collections Unit is responsible for collecting delinquent debt from taxpayers, including by taking legal action against taxpayers with outstanding business tax debt.  Such action may include issuing and docketing a tax warrant in the County Clerk’s office, which is enforceable as a judgment, enabling DOF to seize the taxpayer’s assets or levy on the taxpayer’s bank account to collect the judgment amount.  The judgment debt can also be referred to an outside agency for collection.

When the business-tax debtor is a vendor that sells goods or services to the City, DOF’s Collections Unit is also empowered to collect the tax arrears through a DOF procedure known as the “GenTax FMS Vendor Restraint Process.”  This vendor collection process includes an automated interface between DOF’s GenTax system and the City’s Financial Management System (FMS)—the City’s centralized accounting and budgeting system, which is used for, among other things, processing and issuing payments to City vendors for the goods and services they have provided.  It is those payments due to the vendors from the City that DOF is empowered to collect by offsetting and then applying the payments to the vendors’ docketed City tax debts under the restraint process.

To initiate the GenTax FMS Vendor Restraint Process, GenTax generates a file of open warrants listing each business-tax debtor, which is sent weekly to FMS, and an automated match is performed.  Based on that match, restraints, also known as holds, are placed on the FMS payment vouchers payable to City vendors with outstanding tax warrants.  When such a hold is placed on a payment, DOF’s Collections Unit sends Offset Notification letters to the affected vendor to inform it that the amount under restraint will be seized and offset automatically if full payment of the warrant debt is not received within 15 days of the date specified in the letter.

Thereafter, if the vendor’s tax-warrant debt remains due after the 15-day notice period, the DOF Collections Unit is authorized to ask the Office of the New York City Comptroller (Comptroller) to pay the vouchered funds to DOF rather than to the vendor, as an offset against the vendor’s City tax debt.  By properly using this collection method, DOF can effectively recover outstanding tax debt owed to the City by City vendors.

Audit Findings and Conclusion

Although DOF effectively restrains payment vouchers due to City vendors with outstanding tax warrants, it does not follow up by seizing and offsetting the vouchered funds against the vendors’ City tax debt, as permitted by law.  Instead, after restraining a vendor’s payment vouchers, DOF waits for the vendor to contact its Collections Unit, so that it can set up a payment plan with, or otherwise induce payment from, the vendor.  DOF does not systematically track the overall amounts it collects through that practice and as of the date of this report has not provided the information we requested that would enable us to assess its effectiveness in collecting the arrears due to the City from City vendors.  Based on the information provided, however, DOF, by forgoing the available offset process, has missed opportunities to collect business-tax debt that is due to the City.  In some cases, DOF released the vouchers it was holding in favor of a payment plan with a vendor who thereafter defaulted on that plan, continued to collect payments from the City and failed to make good on its City tax debt.  In at least one such case we identified, no subsequent payment vouchers were available for restraint and offset.  Accordingly, as a result of DOF’s failure to collect the vendor’s tax arrears through a legal offset, it lost the opportunity to do so since—having collected more than $428,518 in vouchered payments from the City—the corporation is dissolved, according to DOF’s records, while it owes more than $80,000 in unpaid taxes.

According to DOF’s records, as of February 5, 2018, the agency had docketed 254 open warrants totaling $5.7 million in unpaid business taxes against 192 City vendors, 186 of whom were owed a total of $2.6 million in vouchered funds that had been placed on hold under DOF’s “GenTax FMS Vendor Restraint Process.”  However, as of early 2018, DOF had not used that process to offset—i.e., collect—delinquent business-tax debts from vouchers payable to City vendors since October 2014, while at the same time, the City did business with and made payments to these vendors notwithstanding their delinquent taxes.  DOF was unable to tell us how much docketed tax debt it collected from City vendors through other means.

Audit Recommendations

DOF should:

1. Develop and implement a system to track and measure its compliance with and the effectiveness of its procedures for the collection of docketed City tax debt from City vendors.
2. Revise its operations and procedures to enhance the ability of the DOF Collections Unit to take direct actions to collect docketed tax debt through offset from City vendors, including training staff on how to complete the offset process and increasing staff access to FMS.
3. Revise its written procedures to require that whenever a payment voucher earmarked for a City vendor with an open, docketed tax warrant has been restrained and a specific time period (to be determined by DOF) has elapsed and other collection methods have not been successful, the Collections Unit must generate a “Comptroller assignment memo” requesting that the Comptroller’s Office assign the withheld payments to DOF, unless (a) the warrant has been fully satisfied, or (b) a decision has been made and recorded in GenTax, to suspend collection efforts for a limited time (to be determined by DOF) to allow DOF to review the case.
4. Not release a payment voucher until the docketed tax warrant or judgment is substantially satisfied, vacated by a court or withdrawn by DOF after appropriate documentation has been filed in GenTax indicating the basis for that action.
5. Request and obtain FMS access as needed for the offset process.
6. If other collection methods have not proven to be successful, use the City payment vouchers that are on hold to offset open docketed warrants totaling approximately $5.7 million owed by City vendors.

Agency Response

The DOF agreed with the report’s findings and recommendations and described the steps it has taken or will take to implement the report’s recommendations.

[1] Approximately $1.3 billion in tax revenue is derived from Cigarette Tax, Commercial Motor Vehicle Tax, General Corporation Tax, Financial Corporation Tax, Unincorporated Business Income Tax, Utility Tax, Hotel Room Occupancy Tax, Commercial Rent Tax, Conveyance of Real Property Tax and Surcharge on Liquor Licenses.