Suffolk To Push Treasury Department to Reverse Septic Replacement Tax Liability

Suffolk County’s Septic Improvement Program has faced an uphill battle from its start back in 2014, when the county began looking for volunteers to install new advanced wastewater treatment systems to replace their aging septic systems.

At the time, the county offered systems that then cost about $15,000 to 19 homeowners, free of charge, as a pilot project to see how well the systems would filter nitrogen out of the waste they contained. Excess nitrogen from septic systems is one of the primary drivers of harmful algae blooms in water bodies here.

Since that pilot project began, the costs of the systems have risen, with many homeowners looking to upgrade their septic systems receiving prices in excess of $30,000. With the help of $100 million in federal, state and county funding received in 2021, the county has been seeking to dramatically expand the program.

But there is a big catch. In 2018, Suffolk County Comptroller John Kennedy, a Republican who was launching a campaign to run for Suffolk County Executive against County Executive Steve Bellone, began issuing IRS 1099 forms to people who received the grants, which in some cases has had dramatic tax impacts on people who volunteer to upgrade their septic systems.

On April 18, Tax Day this year, Mr. Bellone and a group of legislators and environmentalists gathered on program participants Louis and Brittany Castronova’s front lawn in Islip to demand the IRS issue a ruling that the grants not be considered taxable income.

“When you grow up and you stand on this earth, you say ‘what can I do to better the environment,” said Mr. Castronova. “I knew we had a problem with the block cesspool here and I did a Google search and found this grant program and I was very excited. I want to give my kids a better tomorrow.”

“It was a fairly simple, quick and easy process, but we felt impacted when we found out it would be taxed as income,” he added. “I was able to get two other people on my block to join the program, but it’s a lot harder now, as a homeowner, to argue the case. I don’t want to put someone else in a financial burden. We’re looking for a greener tomorrow.”

“This program is designed to make investments to protect water quality for us all. Not a dime of it should be taxed,” said Mr. Bellone, who said he’s heard stories of people whose taxes have gone up by as much as $8,000, or who have ended up in a higher tax bracket, jeopardizing their Social Security income and their ability to receive college financial aid for their children. “Residents who voluntarily participated in this program to protect and improve water quality are being punished.”

Mr. Bellone said the county heard from the IRS in June of 2021 that the IRS would issue a new ruling stating the grants should not be taxed as income, but that ruling never came. The county is now attempting to get Treasury Secretary Janet Yellen to intervene, and looking to work with the U.S. Congress to draft legislation nullifying the current IRS position if the agency doesn’t change its tune.

“We’ve been fighting this fight for three years now,” said Suffolk County Legislator Bridget Fleming. “The County Comptroller, against the advice of the county Attorney, began issuing 1099s attacking an environmental program. This actually knocks some people up into a higher tax bracket, with cascading effects on families’ budgets.

“What should happen is the IRS should stand up to recognize that this was a partisan hit on an environmental program,” she adeed.

“This is one critical way the IRS can participate in Earth Week,” said Adrienne Esposito of Citizens Campaign for the Environment. “We’re asking the IRS to move forward and join America in protecting the Earth by simply changing the tax code…. This is a choice. We’ve already heard from the IRS. They can, will and want to do it. They’re just not doing it.”

U.S. Senate Majority Leader Chuck Schumer also weighed in on the issue in an April 18 statement.

“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.”

“It’s easier to get a giant bill through Congress than to get an agency to self-correct,” said Kevin MacDonald of The Nature Conservancy at the event on the Castronovas’ front lawn. “It’s ridiculous, but that’s where we are.”