Chair Lee on Section 1127 miscalculation affecting 40,000 city employees
Lee asks about a 10-year miscalculation of Section 1127 returns that resulted in over $100 million in lost revenue. Commissioner Lee explains the STAR benefit was incorrectly applied on both state and city sides after a 2016 shift, the error was discovered during an internal review, and corrections apply only to tax year 2025 with no clawback for prior years.
All right, so moving on to Section 1127 returns.
As a condition of city employment, any employee who is not a resident of New York City is required to make a payment equivalent to what their New York City income tax would have been if they were a city resident.
It is the council's understanding that DOF has been incorrectly calculating Section 1127 returns for 10 years, which has resulted in more than $100 million in lost revenue to the city.
This error was recently fixed, which has led to some city employees seeing a reduction in their tax refund or even charges to their account as a means for the city to take.
The missing revenue.
I feel like that impacts some folks here too.
Can you please explain how the 1127 bills were supposed to be calculated and what was wrong to lead to a 10-year miscalculation?
Yeah, so the 1127 waiver is essentially a contractual condition of employment for employees who live outside of New York City.
The city charter requires that New York City employees who live outside the five boroughs have to pay the equivalent of their New York City personal income tax liability.
So each filing year, employees would...
then withhold a portion of the income.
And so if they withhold, to cover this tax liability, so if they withhold greater than the tax liability, they get a refund.
If they withhold less, then they'll have to pay into it.
As part of that process, the school tax relief, the STAR benefit, was calculated against the city's personal income tax up until 2016.
After 2016, it was shifted to be a credit that's calculated against your state personal income tax.
So they're essentially receiving on the state side, but our systems kept continuing to provide this on the city side as well.
So essentially they're receiving the STAR credit from both the state and the city.
Earlier this year, we made the discovery that the city was still calculating this benefit off the 1127 return.
We notified City Hall and then we recalculated the refunds and balances owed this year for this tax year for 2025.
No other changes are going to be made on the Section 1127 for tax years before 2025.
Okay, so they're not going to be penalized for not having, I mean, for taking the...
Yeah, we're only correcting it for this year.
We're not doing a clawback for any previous years.
Okay, how was the mistake discovered?
I'm sorry?
How was the mistake discovered?
Oh, so it was discovered while we were doing an internal review of the 1127 way before.
Got it.
Okay.
What's the exact amount of the lost revenue as a result?
Do you know?
It averages just about like $10 to $12 million a year.
It's different per year.
And to $12 million per year.
Per year.
Okay.
And then does DOF or OMB have any plans?
No, you already answered that part.
So who is responsible now for the administration of the 1127 waiver?
That still remains Department of Finance.
Okay.
DOF is the primary administrator of the 1127 waiver.
Okay, and how many employees are currently under 1127?
Lever?
Right now, I think it's just about 40,000.
40,000.
Okay, perfect.