HAUPPAUGE, N.Y. (CBSNewYork) — The Internal Revenue Service has issued a ruling in a case that could cost Long Island homeowners thousands of dollars in additional federal taxes.

They are residents who received grants to improve their backyard cesspools to help to clean up ground water, CBS2’s Carolyn Gusoff reported Tuesday.

The Brennan home is one of more than 200 in Suffolk County with a new nitrogen-reducing septic system. It was paid for with county grants.

But along with lower nitrogen came higher tax bills. Recipients received 1099s, reporting their grants as taxable income.

“We always get money back from the federal government every year. And this year we had to pay almost $1,500 in taxes,” Howard Brennan said.

MORESuffolk County Residents Unhappy With IRS After Being Taxed On Grants Awarded For Environmental Upgrades

The issue became political squabble. Suffolk County Comptroller John Kennedy Jr. issued the 1099s to residents, while County Executive Steve Bellone insisted the grants, modeled after other states, are not income.

The IRS has spoken in its ruling.

“Those grants are taxable. They’re taxable because it is a benefit being received by the homeowner, but income to the installers as well,” Kennedy said.

The county executive’s water czar said there was no need for the comptroller to ask for an IRS ruling.

“We can’t allow a ruling like this to stand,” Deputy Suffolk County Executive Peter Scully said. “I think the people across this county are scratching their heads and saying why on Earth would an elected official seek to have a federal agency like the IRS impose a new tax on homeowners?”

Kennedy said, “Had we not gone ahead and done this and had we been audited by the IRS the county of Suffolk would have had to pay the penalty, the fines, and all the taxes, too.”

FLASHBACK: Law Would Require Suffolk County Homeowners To Replace Failing Cesspools

Suffolk lawmakers said they’ll have to find a way to keep the clean water grants from costing taxpayers.

“Our sole source aquifer, the place we get our drinking water, is impacted by these very outdated septic systems, so we are going to move forward aggressively,” Legislator Bridget Fleming said.

U.S. Sen. Chuck Schumer also weighed in.

“The IRS got this flat wrong because the local program is a win-win for Suffolk homeowners and the environment, which is overrun with nitrogen pollution in our waterways,” Schumer said. “Homeowners, and Suffolk County, are already taxed by nitrogen. They shouldn’t also get a bill from the IRS for trying to reduce it. Uncle Sam isn’t losing out on a dime when a Suffolk homeowner participates in this grant program, because the local contractors are already paying the tax. It’s just that simple.”

Homeowners are still enrolling in the program — more than 100 just last month. If you received one of these grants, your advised to consult with a tax professional on what to do now.

The grants were between $10,000 and $30,000, so the tax impact will vary.

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