Using Tax Day as a backdrop, Suffolk County Executive Steve Bellone was joined by elected officials, impacted homeowners and environmentalists in blasting the IRS for failing to follow through with a ruling it said would be issued last year declaring that grants under the County’s landmark Septic Improvement Program (SIP) should not be considered taxable income for homeowners. The County Executive called on Treasury Secretary Janet Yellen to intervene and direct the IRS to act to end the double taxation of funding Suffolk County approved by Suffolk County voters to protect and improve water quality.
“Suffolk County voters have approved the use of sales tax revenues to improve water quality, only to see those water quality funds taxed not once, but twice by the IRS,” said County Executive Bellone. “These funds are being used to address critical environmental needs in our region. The professional installation companies which actually receive the grant funds are already declaring the funds as business income and paying taxes on those funds. That’s why we are calling on the Treasury Secretary to step in and ‘axe the double tax.”
Majority Leader Chuck Schumer said: “An innovative and award-winning environmental program, Suffolk County Executive Bellone’s Septic Improvement Grant Program is an important tool to beat back the nitrogen pollution that plagues our waterways and threatens public health and safety. I once again urge the IRS not to consider the grant funding – money which the participating homeowners themselves never touched – as personal income and urge them instead to take corrective action and provide relief to Suffolk County residents.”
The County Executive will be sending a letter to Secretary Yellen urging the Treasury Secretary to intervene to direct the IRS to issue a ruling promised last year to protect homeowners who upgrade their cesspools and septic systems from income tax liability. After indicating that action would be taken, IRS staff involved in the issue advised the County that they had been overruled by IRS officials “up the line”, and would not act on the County’s request. Now, hundreds of Suffolk County homeowners are filing tax returns that will cost them thousands of dollars in baseless taxes for the 2021 tax year.
Suffolk County’s landmark Septic Improvement Program (SIP), established in 2017, provides grants to homeowners who choose to replace outdated cesspools and septic systems that are polluting the environment with new state-of-the-art nitrogen reducing technology. The program has made Suffolk a national leader in efforts to reduce nitrogen pollution and received a New York State Environmental Excellence award in 2021.
To make it easy for homeowners to participate, the program is designed so that homeowners themselves never receive the grant funds. Instead, the funds are disbursed directly to installation contractors, who pay taxes on the grant funds as business income.
In 2019, ignoring an opinion from the County’s tax counsel, the Suffolk County Comptroller issued tax forms making the grant funds taxable income for homeowners. In January 2020, in response to a request from the Comptroller, the IRS issued a ruling declaring that the grants should be considered taxable income for homeowners, even when homeowners never actually receive the grant funds, the installers who do receive the funds are already paying income taxes on the grants.
As result of the ruling, some homeowners saw their income taxes increase by as much as $8,000, while many others chose not to participate in the SIP program due to potential tax liability. In addition, homeowners complained about other negative impacts resulting from the false inflation of income. Some homeowners reported being forced into higher tax brackets, making Social Security benefits taxable, jeopardizing senior citizen property tax exemptions, reducing college financial aid amounts for children of grant recipients, and increasing family health insurance premiums.
After an investigation revealed that the information the Comptroller had provided to the IRS in requesting a ruling was outdated, incomplete and inaccurate, the County Executive formally requested that the IRS reconsider the issue and either revoke or modify the ruling issued to the County Comptroller.
After completing a review of the more accurate information submitted by as part of the County Executive’s request for reconsideration, the IRS advised the County on June 21, 2021 that the County Executive’s efforts were successful, and that a new ruling was being drafted that would reverse the prior determination that grants funds should not be considered taxable income for homeowners. The new ruling would be retroactive, meaning that any homeowner who had already paid income taxes on a grant under the SIP program would be entitled to a refund.
“To the IRS’s credit, they essentially admitted that the initial ruling was flawed, and indicated that they would fix the problem,” said County Executive Bellone. “Needless to say, this was welcome news, since double taxation of grant income was costing homeowners thousands of dollars, leading many other homeowners to decide not to participate in the program, and diverting millions of dollars approved by voters to improve water quality.”
When several months passed without the promised ruling being issued, the County requested an updated timetable and was advised on September 24, 2021 that the IRS was going back on its statement because the IRS staff responsible for the new ruling had been overruled by others higher up in the IRS. Instead of issuing the new ruling to protect homeowners from income tax liability, on November 8, 2021, the IRS sent the County Executive a letter stating that the IRS simply would not act on the County’s request, and would instead close the case
“The saddest thing about this governmental malfeasance is the real financial pain it has caused for hundreds of homeowners who stepped up to do the right thing to protect the environment,” said County Executive Bellone. “These grant funds are themselves derived from tax revenues that the people of Suffolk County voted to invest to improve water quality, the IRS determination means that the grant funds are actually being taxed three times. Worse yet, instead of using the funds being used to improve water as approved by voters, homeowners are being forced to send millions of dollars to the federal government. This situation is unacceptable, which is why we are calling on Treasury Secretary Janet Yellen to intervene with the IRS and direct that the letter ruling we were told was forthcoming be issued as soon as possible.”
Suffolk County Legislature Minority Leader Jason Richberg said: “Taxpayers should not be penalized for doing their part to help protect our aquifer. These grants should not be considered normal taxable income, they are an investment in minimizing our impacts on the environment and should be treated as such.”
Suffolk County Legislator Bridget Fleming said: “I stand with County Executive Steve Bellone, my colleagues on the Legislature, my partners in environmental protection, and fellow residents, as we continue to fight for a fair determination from the IRS. We have been in this struggle for three years, demanding that the IRS stand with homeowners who are helping to reverse decades of pollution by participating in our landmark Septic Improvement grant Program. The grants reduce the financial burden on homeowners, protect family budgets, and encourage participation in this critically important initiative to protect our rivers, bays and harbors. Taxing the grants has not only unfairly added to the tax burden of individuals and families, it has had the unfortunate effect in some instances of moving taxpayers into higher tax brackets with cascading effects on family budgets. It is high time that the IRS clarify its ruling and release its stranglehold on taxpayers who are doing the right thing.”
Suffolk County Legislator Al Krupski said: “Thank you to County Executive Steve Bellone for his leadership in the efforts to improve water quality. This is a long-term solution to a problem created over the decades. This current problem with the funding mechanism is an example of how public servants, both county and federal, have to work together to save the taxpayer.”
Suffolk County Legislator Trish Bergin said: “The grant monies for septic systems never even hit the hands of these homeowners. The grants went straight to the contractors, who paid sales tax. How could the IRS possibly tax the homeowner?!”
Adrienne Esposito, Executive Director of Citizens Campaign for the Environment said: “This small change in the tax code will have a big impact on water quality and moderate income homeowners. We have been asking for this small change for years. If the Administration really wants to back up their commitment to help the working class, they would get this done. The delay is damaging, unwarranted and reflects that the needs of the public are unheard.”
Bob DeLuca, President, Group for the East End said: “Suffolk County has made more progress toward a clean water future in the last five years than we have seen in the prior twenty, and the IRS should not be undercutting the full value of the critical financial incentives local homeowners need to do their part for our local waters. We applaud the County Executive and his water quality team for the progress that has been made and for pressing this issue with the IRS.”
Louis Castronova, Homeowner who participated in the program said: “Essentially, we are being taxed and affected for correcting a long term Environmental problem. This project is larger than just a single family and needs to be readily available without consequences.”