The tax is meant to target secondary homes: If you claim your New York City residence is second to one you own out of state, you may owe the pied-à-terre tax, depending on the home’s value. Now, if you happen to live at that secondary residence to reap the joys of what comes with living in the Big Apple, but you file your income tax at a residence out of state, or register your car out of state to save on taxes and insurance, you’re committing tax fraud.

The pied-à-terre tax is putting potential tax cheats in a bind: keep the status quo of claiming your New York City residence as a secondary home, and pay the pied-à-terre tax. Fess up and refile your income taxes and car registration to where you lay your head in the five boroughs, and you pay New York’s income taxes and car insurance rates. Now, the New York Governor’s Office is looking into all the people who have been committing fraud all along.

“Hard-working New Yorkers pay taxes that fund our schools, roads, transit, and public safety. The pied-à-terre tax was designed to ensure people who can afford luxury second homes, but don’t pay New York income taxes, are still contributing to the city they benefit from,” Jen Goodman, director of rapid response at the governor’s office, told Fortune.

“If you’ve been falsely claiming to be a non-resident in order to cheat the system, it’s time to come clean—or our Department of Tax and Finance will take action to ensure you pay your fair share.”

A spokesperson for New York City Mayor Zohran Mamdani said the Mayor’s Office agrees with the executive office’s move.

“Mayor Mamdani worked alongside Governor Hochul and partners in Albany to pass the pied-a-terre tax so that we can fund cleaner parks, safer streets, and other critical investments across the five boroughs,” said Matt Rauschenbach.

“We are committed to ensuring that every New Yorker who owes the pied-à-terre tax pays it—and helping those who don’t file for an exemption,” Rauschenbach continued. “We share the Governor’s goal of ensuring that everyone claiming a tax benefit or exemption is actually supposed to be receiving it.”

A tax will be levied either way

New York Gov. Kathy Hochul, along with Mayor Zohran Mamdani, jointly proposed the tax in April, framing it as a way to close New York City’s budget gap without touching everyday residents. The proposal targeted luxury second homes in New York City valued at $5 million or more, letting the city levy a yearly surcharge aimed at non-New York City residents, and was projected to generate at least $500 million a year in recurring revenue for the city.

“If you can afford a $5 million second home that sits empty most of the year, you can afford to contribute like every other New Yorker,” Hochul said at the time. Mamdani unveiled the tax in a Tax Day video, and called it a way to make sure the wealthy contribute what they owe while the budget reflects the administration’s commitment to working New Yorkers being priced out of the city.

Four months later, the tax is doing more than closing a budget gap. Fortune was the only publication to report on this unintended effect of the pied-à-terre tax: an extra residency tax auditor, catching people who register cars out of state to dodge New York’s high insurance rates while actually living and driving in the city full time. Now the same dynamic is playing out with income taxes. Some people are now in a bind: pay New York’s income taxes and car insurance and switch their paperwork to match where they actually sleep, or pay the pied-à-terre tax instead. Either way, a tax gets levied.

Hochul’s office says it’s watching for potential tax fraud surfacing through the exemption process, since owners who want out of the surcharge have to prove the home in question is their primary residence—proof that can just as easily reveal the opposite: someone who lives in the city full time but filed taxes elsewhere to avoid paying New York.

According to sources with knowledge of the matter, the governor’s office is looking into potential tax fraud as a result of the new tax. New York’s Department of Tax and Finance carries out ongoing audits of residents in the state.

It’s real fraud

The penalties on both sides of this trade-off are steep enough to make switching your paperwork look cheap by comparison. On the car insurance side, driving without valid New York insurance can bring a traffic court fine of up to $1,500, plus a separate $750 civil penalty to restore a revoked license. Getting caught with a fraudulent registration or plate is worse: a first offense is a misdemeanor, and a second offense within ten years becomes a class E felony, which can carry up to four years in prison and a fine of $5,000, or double whatever the person gained through the fraud.

Income tax residency fraud carries its own score of penalties. A misdemeanor conviction for tax fraud brings a financial penalty of $10,000 for individuals and $20,000 for businesses, on top of back taxes owed. Push the case up the ladder, and the numbers climb fast: Criminal tax fraud in the first degree is a felony that can carry up to 25 years in prison and a fine of up to $100,000, or double the amount of tax underpaid, whichever is greater. And unlike a one-time insurance fine, back taxes come with interest attached for every year someone was filing in the wrong state.

The rollout of the tax was shaky to begin with. Many people cried it was a measure of doxxing people’s names and addresses—despite property tax record being public in most cities across the country and being on the public record in New York City since 1830. A supplemental list combined the assessed values and people’s addresses, totaling nearly 960,000 addresses. However, the city only sent out letters to 17,000 homes, with an expected total of around 10,000 recipients estimated to be subject to the tax.

According to NY1 reporter Bernadette Hogan on X, out of the 17,000 recipients of those letters, about 7,000 started exemption applications and 2,600 submitted them so far.