Suffolk officials blast IRS over septic improvement tax

Elected officials joined environmentalists and homeowners at a press event Monday to urge the federal government to end its taxation of septic improvement grants in Suffolk County. 

Suffolk County Executive Steve Bellone blasted the IRS for failing to follow through with a ruling it said would be issued last year declaring that grants under the county’s Septic Improvement Program should not be considered taxable income for homeowners. 

“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,” Bellone said in a county statement. “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.” 

The septic program launched in 2017 provides grants to homeowners who choose to replace outdated cesspools and septic systems that are polluting the environment with new nitrogen reducing technology. The funds from the grants are disbursed directly to installation contractors, who pay taxes on the grant funds as business income. 

But in 2019, Suffolk County Comptroller John Kennedy issued tax forms making the grant funds taxable income for homeowners. In Jan. 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. 

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 septic program due to potential tax liability. 

Bellone requested that the IRS reconsider the issue and either revoke or modify the ruling issued to the comptroller and in June 2021, the IRS advised the county that a new ruling was being drafted that would establish that grants funds should not be considered taxable income for homeowners. The new ruling would also be retroactive, so any homeowner who had already paid income taxes on a grant under the septic program would be entitled to a refund.  

However, IRS staff involved in the issue advised the county that they had been overruled by IRS officials and would not act on the county’s request. Bellone will be sending a letter to Treasury Secretary Janet Yellen urging her to intervene in the tax dispute. 

“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,” Bellone said. “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. 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.”