The Internal Revenue Service’s oversight of the Low-Income Housing Tax Credit program remains minimal at best, despite a critical report last year by the Government Accountability Office, according to a new GAO report.
The Low-Income Housing Tax Credit, or LIHTC, encourages private-equity investment in low-income housing through tax credits. The IRS administers the program, along with what are called “allocating agencies,” typically state or local housing finance agencies that have been set up to meet the affordable housing needs of their jurisdictions. The responsibilities of the allocating agency (outlined in Section 42 of the Internal Revenue Code and Treasury Department regulations) encompass awarding credits, assessing the reasonableness of the project costs, and monitoring the projects.
In a report last July, the GAO found that IRS oversight of these allocating agencies was minimal and recommended joint administration with the U.S. Department of Housing and Urban Development, or HUD, to more efficiently address the oversight challenges. The new report reviews how the allocating agencies administer the LIHTC program and identifies any of their oversight issues. However, the report continues to show that IRS oversight remains minimal, particularly in reviewing allocation plans and practices for awarding discretionary basis boosts, and that action is still needed to address the GAO's prior recommendations.
For the new report, the GAO reviewed regulations and guidance for allocating agencies; analyzed 58 allocation plans (from 50 states, the District of Columbia, U.S. territories, New York City and Chicago); performed site visits and file reviews at nine selected allocating agencies; and interviewed IRS and HUD officials. The GAO concluded that the IRS doesn’t give state and local agencies clear guidance on how to report program noncompliance and doesn’t organize or track information from noncompliance reports. Both reports came in response to a request by Sen. Chuck Grassley, R-Iowa, and a third report is expected.
“The taxpayers forgo $8 billion a year through this program to help ensure the development of affordable rental housing,” Grassley said in a statement. “The IRS is responsible for making sure the tax credit is administered properly so the program achieves what it’s meant to do—provide safe, affordable housing for those in need. The report finds that the IRS isn’t doing nearly enough to help state and local agencies properly allocate the tax credit, and the IRS doesn’t track problems when they’re reported. The IRS should follow the GAO’s recommendations to improve oversight of the tax credit. Affordable rental housing is a critical need, and the IRS needs to make sure the tax credit is administered right.”
The GAO acknowledged that the allocating agencies administering the LIHTC program have certain flexibilities for implementing program requirements and the agencies have done so in various ways. Although the GAO found that allocating agencies generally have processes to meet requirements for allocating credits, reviewing costs, and monitoring projects, some of these practices raised concerns.
For example, more than half of the qualified allocation plans (developed by 58 allocating agencies) analyzed by the GAO did not explicitly mention all selection criteria and preferences that Section 42 of the Internal Revenue Code requires. The allocating agencies notified local governments about proposed projects as required, but some also required letters of support from local governments. HUD has raised fair housing concerns about this practice, saying that local support requirements (such as letters) could have a discriminatory influence on the location of affordable housing.
Allocating agencies can increase the eligible basis used to determine allocation amounts for certain buildings at their discretion, the GAO noted. However, they are not required to document the justification for the increases. The criteria used to award boosts varied, with some allocating agencies allowing boosts for specific types of projects and one allowing boosts for all projects in its state.
The GAO also identified a number of issues related to the IRS’s management of noncompliance information from the allocating agencies. The IRS provides discretion to allocating agencies for reporting noncompliance data but has not provided feedback about data submissions. Consequently, the allocating agencies have been inconsistently reporting these data to IRS.
In addition, the IRS has not used the information it receives from allocating agencies to identify trends in noncompliance. The GAO's analysis shows the IRS recorded only about 2 percent of the noncompliance information it has received since 2009 in its database.
The IRS also has not used key information when determining whether to initiate an audit, potentially missing opportunities to initiate LIHTC-related audits.
In contrast, HUD collects and analyzes housing data, and through a Rental Policy Working Group initiative, now adds LIHTC inspection results to its database, the GAO pointed out. The IRS division responsible for the LIHTC told the GAO it was unaware of this effort and is not involved with the working group. By participating in the working group, the IRS could leverage HUD data to better understand the prevalence of noncompliance in LIHTC properties and determine whether to initiate audits, the GAO noted.
The GAO recommended the IRS clarify when agencies should report noncompliance and participate in the Rental Policy Working Group to assess the use of HUD's database to strengthen IRS oversight. The IRS agreed it should improve its noncompliance data, but also stated that it had to consider resource constraints. HUD supported using its expertise and experience administering housing programs to improve the LIHTC.
In response to the report, John M. Dalrymple, deputy commissioner for services and enforcement at the IRS, pointed out that the IRS provides extensive information to the state allocating agencies for the LIHTC through its Audit Technique Guide for completing the Form 8823, which is used by low-income housing credit agencies to report noncompliance or building disposition, including information about when desk audits, site visits and file reviews should be performed and how to determine noncompliance in health and safety standards, rent ceilings, income limits and tenant qualifications. The IRS’s compliance unit also reviews the Forms 8823 and 8610 that have been submitted to it, and all cases that reflect potential taxpayer noncompliance are reviewed.
The IRS agreed it should improve noncompliance reporting and data collection, but pointed out that significant resource constraints have affected its ability to implement a wide range of improvements in procedures and controls, including improving its database.
“Despite this impediment, we are currently working to obtain an updated server and programs that will allow us to better collect and analyze the data,” wrote Dalrymple. “We agree that it may be helpful to receive more consistent information on LIHTC noncompliance, and will explore options to clarify when allocating agencies should report noncompliance, building disposition or other information on the Form 8823.”
As for participating in HUD’s Rental Policy Working Group, he pointed out that the group was established by the White House to address fair housing concerns and cannot address tax matters.
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