The Government Accountability Office (GAO) issued a report concluding that the Internal Revenue Service (IRS) continues to exercise lax oversight of state and local agencies that allocate tax credits under the Low Income Housing Tax Credit (LIHTC) program. In particular, the IRS does not review allocating agencies’ (commonly referred to as housing finance agencies, HFAs) Qualified Allocation Plans (QAPs) and their practices for awarding discretionary 130% tax credit basis boosts. GAO also found that IRS records very little of the information in project noncompliance forms submitted by allocating agencies and does not review the forms that have critical noncompliance issues.
The May 11, 2016 report, titled Low-Income Housing Tax Credit: Some Agency Practices Raise Concerns and IRS Could Improve Noncompliance Reporting and Data Collection, follows a July 2015 report recommending that Congress consider designating HUD as a joint administrator responsible for LIHTC program oversight (see Memo, 7/27/15).
Section 42 of the United States Code is the statutory basis for the LIHTC program. Among other requirements, QAPs must give preference to certain projects and incorporate ten selection criteria, such as projects serving tenant populations with special housing needs, tenant populations with children, and tenants on public housing waiting lists. The GAO reviewed the QAPs of 58 allocating agencies and found that QAPs did not consistently contain address information or mention selection criteria, though some allocating agencies incorporated this information in other LIHTC documents. IRS officials stated that they did not regard regular review of QAPs as part of their responsibilities.
Section 42 requires allocating agencies to notify the chief executive of the local jurisdiction in which a LIHTC project is to be located and provide the official with a reasonable opportunity to comment on a proposed project. The GAO identified 12 agencies that require local letters of support as a threshold requirement and another 10 that provide competitive points to projects that have letters of support. HUD has raised fair housing concerns about QAPs with local approval requirements or preferences and has recommended eliminating them from QAPs.
The Housing and Economic Recovery Act of 2008 (HERA) allowed allocating agencies the discretion to give a 130% “discretionary basis boost” to any project, effectively increasing the amount of tax credits to that project. Prior to HERA there were only two opportunities for a project to receive a 130% basis boost: 1) if the project was located in a Qualified Census Tract (QCT), a census tract where 50% or more of the households have incomes less than 60% of the area median income (AMI), or where the poverty rate is greater than 25%; or 2) if it was located in a Difficult to Develop Area (DDA), an area designated by HUD as having high construction, land, and utility costs relative to AMI.
Section 42 requires allocating agencies to find that a discretionary basis boost is necessary for a project to be financially feasible, but the statute does not require agencies to document financial feasibility. The GAO notes that HERA’s legislative history included expectations that agencies would set standards for awarding a discretionary basis boost in their QAPs. The GAO learned that IRS does not review agencies’ criteria for awarding discretionary basis boosts, nor does it provide guidance for determining whether a project might need a basis boost to be financially feasible. The GAO found a range of allocating agency practices, including automatic discretionary basis boosts without determining financial feasibility, which could result in fewer housing projects being subsidized and more credits provided than are necessary for financial feasibility.
Allocating agencies are responsible for monitoring a LIHTC property’s physical condition and compliance with tenant income eligibility and maximum contract rent rules for the 15-year compliance period. Agencies must submit noncompliance information using IRS Form 8823. The GAO found that allocating agencies had varying practices for submitting noncompliance information because they interpreted IRS guidance differently, resulting in agencies providing varying levels of information and submitting the forms at irregular intervals. The GAO concluded that without IRS clarification about what to include in Form 8823 and when to submit it, agencies will continue to submit inconsistent noncompliance data, making it difficult for the IRS to efficiently distinguish between minor violations and severe noncompliance, such as properties with health and safety issues.
The GAO also reported that the IRS records little of this information in its database and does not review the forms for critical noncompliance issues. Consequently, the IRS cannot provide program-wide information on the most common types of noncompliance or ascertain trends in noncompliance. In addition, the IRS has no method to determine whether issues reported as uncorrected have been resolved or if properties have recurring noncompliance issues.
Without a better process to gather consistent noncompliance information from allocating agencies and to regularly review compliance trends, the GAO asserts that there is a significant risk that ongoing noncompliance issues at LIHTC properties may not be detected and that appropriate actions, including recapture of tax credits, will not be taken.
GAO Report 16-360 is at: http://1.usa.gov/1PjbqWW
More information about LIHTC is on page 5-29 of NLIHC’s 2016 Advocates’ Guide at: http://bit.ly/1Tn9sqm