An accountant’s query has led to a costly discovery that city workers who retired on supposedly tax-free disability pensions owed hundreds of millions of dollars in federal taxes.
Most holders of such pensions, mainly cops and firefighters, have nothing to fear. After months of negotiations, the IRS decided it would be too tough to unravel the 70-year-old snafu.
The agency grandfathered in 24,000 people who began receiving the pensions before Jan. 9. But those who retired after Jan. 9 will be taxed on a relatively small portion of the pensions.
The saga began in 2006, when an accountant for a teacher who retired on a disability pension started asking questions.
Officials found that the city had been contributing a portion of employees’ salaries 3 percent in some cases to an annuity fund. That portion of the pension is subject to federal, but not state or city, taxes.