Comptroller Releases Findings of Lost City Revenue in Audit of Department of Finance

One of the buildings designated by the Department of Finance as a primarily residential Class 1 property. Image credit: Office of the New York City Comptroller

One of the buildings designated by the Department of Finance as a primarily residential Class 1 property. Image credit: Office of the New York City Comptroller

The audit report reveals that the misclassification of 140 properties has deprived the City of $1.7 million annually in lost property tax revenue. On February 18, 2016, the Office of the NYC Comptroller publicized the results from its audit of the New York City Department of Finance.  The audit sought to investigate whether the Department of Finance had implemented procedures that adequately safeguard against the misclassification of Brooklyn property sites. The Comptroller’s Office and DOF ultimately seem to differ on the definition of “adequate.”

The Department of Finance is the City agency in charge of receiving and keeping track of the City government’s revenue and values every land parcel located within the City’s limits for taxation purposes.  In valuing the City’s land, the DOF assesses the properties at a set percentage of their full market value. The percentage used is dependent upon the New York Real Property Tax Law, or RPTL, tax classification system, which is broken down into four classes of properties.  All of the real estate in the City is assessed at 45 percent of the fair market value, except for Class 1 properties, which are assessed at six percent.

The DOF designates each parcel as one of four possible tax classes.  Class 1 applies to residential developments and mixed-use developments that utilize at least half of the development for residential usage, where the development contains no more than three residential and commercial units.  Primarily residential developments that do not fit within Class 1 fit neatly in Class 2, which is additionally broken down into three subclasses: Class 2a (developments with four to six rental units), Class 2b (developments with seven to ten rental units), and Class 2c (cooperatives and condominiums with two to ten residential units). Class 3encomposes the real estate owned by utility corporations and special franchise properties not otherwise exempt from Class 3 by the RPTL.  All other properties that are not accounted for in Classes 1 to 3 are lumped into Class 4.

According to the audit report, the Comptroller’s Office inspected 15,952 Class 1, Class 2a, and Class 2b properties, located in the borough of Brooklyn, in July of 2015 and found that 197 of the inspected properties had been potentially classified incorrectly. If these findings had been accurate, the misclassification of the 197 properties would have cost the City $2.09 million in unpaid property taxes.

DOF had inspected 47 of these 197 properties in the two months prior to the Comptroller’s Office’s inspection, even though only 13 of the 47 properties it inspected had been flagged by assessors for re-inspection.  Regardless, as of December 16, 2015, DOF had not yet re-inspected the 13 flagged properties, let alone re-considered their tax classifications.

In light of the investigation results, the audit report found that the DOF had failed to implement tax classification procedures to adequately safeguard the 197 Brooklyn properties from being misclassified, and it issued four recommendations for the DOF to remedy its procedural inadequacies.  First, the audit report recommends that the DOF re-inspect the 197 properties and re-evaluate their tax classifications.  Second, if the re-inspection and re-evaluation uncovers misclassified property, the DOF should amend the property tax assessment rolls to reflect the accurate property tax classifications.  Third, the DOF should retrain its assessors to ensure their ability to make proper and accurate observations in the course of conducting inspections.  Fourth, the DOF should weigh the possibility of improving upon its oversight mechanisms and procedural safeguards implemented to protect properties from misclassifications.

Prior to issuing its final audit report, the Comptroller’s Office issued a draft report to the DOF on January 26, 2016.  In response, DOF alleged its compliance with the Comptroller’s first two recommendations and asserted that 140 of the 197 properties identified by the Comptroller had been misclassified.  However, in light of the 41 identified properties that had originally been classified accurately, DOF argued that the Comptroller made an overgeneralization by finding the DOF classification procedures to be inadequate.

The Comptroller’s Office stood by its assertion of DOF’s inadequacy in “its ability to ensure that properties in Brooklyn have been correctly classified,” which it supported by noting that the reclassification of these 140 properties will result in a City revenue increase of “at least $1.7 million annually.”

To read the full audit report, click here.

By:  Jessica Soultanian-Braunstein (Jessica is the CityLaw Fellow and a New York Law School Graduate, Class of 2015)

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