Paperwork Problems Lead to Tax Problems for Nonprofits

May 9, 2017; Gothamist

A combination of regulations has more than 300 nonprofits in New York City in trouble. Under then-mayor Rudy Giuliani, a 1996 regulation was enacted to allow the city to sell liens on outstanding property taxes and water fees. The policy was intended to pressure delinquent taxpayers to pay the city what they owe while raising revenue on hard-to-get tax debts. (If they were easy to collect, New York City would surely prefer to collect the taxes itself.)

This would not typically be an issue for nonprofits in New York City, as they do not pay either water fees or property taxes. However, a 2011 regulation complicates the matter—it requires all nonprofits to refile for property tax exemptions annually. Through a mixture of nonprofit oversight and clerical errors, some nonprofits have made their way onto the list of tax lien sales. The result is around 324 nonprofit properties, many of them houses of worship, at risk of being sold.

Fordham Law students and nonprofit administrators are working together to find and remove nonprofits on the New York City Department of Finance’s sales list.

Among the concerns expressed here is what might be done with the properties if their ownership were eventually transferred to a private entity. A common cry is that some of these nonprofit-owned properties are vacant lots that could be used more efficiently. The most common suggested use is something to abate the lack of affordable housing in the city, especially since New York stands to lose a substantial amount of federal funding for affordable housing initiatives.

This is an excellent illustration of the regulatory burden faced by charities and how they can have a substantial and negative impact. Sound nonprofit leadership requires not only knowledge of the regulations but the diligence to stay on top of all the filings necessary to maintain nonprofit and tax-exempt status, the requirements for which vary by state. A simple oversight, in this case forgetting to refile for tax exemptions, can lead to very real and very costly problems for these nonprofits.—Sean Watterson