Tax breaks broken

State paid about $5.1 million last year to deceased property owners

The state needs stronger oversight of a property tax break program for seniors and disabled veterans that could be reimbursing Colorado counties millions of dollars improperly, according to a report from the state auditor’s office.

Since 2000, Colorado has granted seniors 65 or older a “homestead” exemption, forgiving half of property taxes owed, up to the first $200,000 in value, for personal residences they had lived in for a decade or more. In 2006, the exemption was expanded to include disabled veterans.

“To us it was this very interesting and obvious question: Why is the state paying for the exemption with no controls over it?” deputy state auditor Monica Bowers said.

Counties validate initial property tax exemption applications but aren’t required to verify ongoing eligibility. Nor are they on the hook to pay the state back for improper exemptions.

“Counties have no financial motivation to ensure they only approve fully qualified exemptions,” according to the audit.

When the state finally conducted its first audit of the homestead exemption, the size of questionable payments proved a big surprise: the eligibility of up to $25.3 million out of the nearly $117 million the state paid counties in 2014 couldn’t be verified independently.

While most of those exemptions might still be valid, some fraction of that large number likely reflects improper payments.

Taxpayers could game the system in a variety of ways, the chief being not letting the state know when the property owner who qualified for an exemption has died.

The state auditor found 10,335 exemptions worth $5.1 million paid last year to applicants who were deceased. State law allows a surviving spouse to continue to claim the exemption but it also requires an updated application be filed, something the audit said most counties aren’t requiring.

Arapahoe County, which has a full-time worker dedicated to overseeing the homestead exemptions, is an exception.

“We do check death certificates,” said assessor Corbin Sakdol.

Surviving spouses are mailed a new application, and the county unlinks an exemption whenever a property transfer occurs.

Among the properties with deceased owners, about 2,436 claims representing $1 million of exemptions involved property owners who listed no other occupant, according to the audit.

That makes it likely someone not qualified to claim the exemption

took it.

Logan County Treasurer Patty Bartlett ran a check after reading the auditor’s report and found two instances where deaths in 2013 didn’t show up in Logan County property records until 2014.

Given that claiming a property is almost always more valuable to heirs than maintaining a property tax break, Bartlett suggested those gaps could reflect the time it takes to clear an estate.

One solution might involve sending notifications out each year on exempted properties asking, under the penalty of perjury, about continued eligibility, she said.

A taxpayer must make a home his or her primary residence for the previous 10 years to qualify for the exemption. But the auditor found 430 cases representing $234,800 in tax exemptions from applicants who described themselves on tax returns as full-time nonresidents.

Married couples are allowed to claim only one property between them, but the auditor found at least 196 cases worth $110,000 in improper exemptions where each spouse claimed a property.

Excluding those who were deceased, there were an additional 43,138 applicants who claimed $20 million in exemptions but didn’t file a state tax return in 2013.

Someone may not file a state tax return for a variety of reasons, including income that falls below reporting requirements. But the lack of a return could indicate a property owner who has relocated to another state, which is a disqualifier.

Sakdol and Bartlett said counties don’t have access to state tax records, so they can’t cross-check against those. And Bowers said one of the questions that needs to be answered is whether eligibility cross-checks are better handled on the state or local level.

As Colorado’s population ages, improving quality controls on the property tax exemption program will become more critical.

About one in nine Colorado residents is at least 65 years old. But by 2040, nearly one in five will be, according to state projections.

To motivate county officials, the auditor recommends the legislature allow the state to recover nonqualifying payments.

“The Colorado County Treasurers Association would go along with the state getting a clawback to claim funds that are improperly paid out,” said Bartlett, president of the group.

Counties will get their money, whether it comes from a state reimbursement for an eligible exemption, or directly from the taxpayer making a full tax payment, she said.

But unwinding a payment in larger counties isn’t as easy as it sounds, said Sakdol, who favors putting in more safeguards on the front end.

The Arapahoe County Treasurer collects taxes on behalf of 355 taxing entities, and any involved in a disputed exemption would need to reimburse the county so it could reimburse the state.

“The Colorado County Treasurers Association would go along with the state getting a clawback to claim funds that are improperly paid out.” Patty Bartlett, county treasurer