IRS Releases Major LIHTC Program Guidance - July 1, 2020

person A.J. Johnson today 07/01/2020

On July 1, 2020, the IRS released an advanced copy of proposed regulations concerning low-income housing tax credit (LIHTC) housing finance agency (HFA) monitoring requirements and Notice 2020-53, which provides COVID-19 related relief to issuers, owners, operators, and tenants of tax credit properties. Following is a detailed discussion of both documents.

Low-Income Housing Tax Credit Compliance-Monitoring Regulations - Proposed Rule

This document contains proposed regulations relating to the compliance monitoring duties of housing finance agencies (HFAs) under §42 of the Internal Revenue Code. These proposed regulations would relax the minimum compliance monitoring sampling requirement for purposes of physical inspections and review of tenant files that were published in the Federal Register on February 26, 2019.

The 2019 regulation required HFAs to inspect no fewer units than the number specified for projects of the relevant size in HUD REAC inspections. This increased the sample size for smaller projects and decreased it for larger projects. All QAPs were to be amended to incorporate these new requirements no later than December 31, 2020.

This proposed regulation is the result of comments provided by industry groups, including HFAs, and trade groups (including the National Council for State Housing Finance Agencies). A major concern of the HFAs was that the 2019 regulation ended Agencies’ ability to use samples of 20 percent of the low-income units in a project when the applicable REAC number is larger. The 2019 requirement increased the number of units that HFAs must examine, increasing Agency costs for additional staff and related expenditures.

The IRS implemented the 2019 regulation in order to ensure an increased statistical confidence that results from the use of the REAC numbers to determine sample sizes for smaller projects. However, the Service agrees that the magnitude of the increased costs and burdens on HFAs outweighs any benefit that may have been derived from the 2019 protocol. For this reason, the IRS is proposing to return to the sample-size requirements that applied under Temporary Regulations issued in 2016. Thus, under the proposed regulation, the minimum number of low-income units that must be included in the random samples of units and files to be reviewed is the lesser of the applicable REAC number or 20% of the low-income units in the project, rounded up to the next whole number.

Example of Impact

  • The 2019 Regulation required a minimum of 18 units to be reviewed (files and physical) for a 50 unit project;
  • The proposed regulation would require a ten file/unit review.

Proposed Applicability Date

This proposed regulation would apply after the date the regulation is published as a final regulation in the Federal Register. However, HFAs may rely on the proposed regulation beginning on February 26, 2019, until December 31 of the calendar year following the year that contains the date these regulations are published as final regulations.  For example, if the final regulation is published in November 2020, and changes from the proposed regulation, HFAs will be able to use the requirements outlined in the proposed regulation until December 31, 2021.

IRS Notice 2020-53, COVID-19 Relief for LIHTC Projects

In response to the COVID-19 pandemic, this notice provides temporary relief from certain requirements under §42 of the Internal Revenue Code and §§142(d) and 147(d) of the Code for properties with tax-exempt bonds.

Background

On March 13, 2020, the President issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing COVID-19 pandemic. This emergency declaration instructed the Treasury Department "to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate…" The emergency declaration applies to all 50 states, Washington DC and the five territories.

Revenue Procedure 2014-49 provides temporary relief from certain requirements of §42 for Agencies and Owners of LIHTC projects. Revenue Procedure 2014-50 does the same thing for properties financed with tax-exempt bonds.

Prior Relief Actions

On April 9, 2020, the IRS issued Notice 2020-23, which provided certain relief to low-income housing projects and postponed due dates until July 15, 2020, with respect to certain tax filings and payments, certain time-sensitive government actions, and all time-sensitive actions listed in Revenue Procedure 2018-58 that were due to be performed by April 1, 2020, but before July 15, 2020. These time-sensitive actions include, among others:

  • The time to show that 10% of project basis has been established;
  • The 24-month rehab period; and
  • Annual Owner Certifications to the HFA.

Scope of Relief Granted in This Notice

  • The 10% Test for Carryover Allocations: If the last day for an Owner of a building with a carryover allocation to meet the 10% test is on or after April 1, 2020, and before December 31, 2020, the last day for the owner to meet the 10% test is postponed to December 31, 2020.
  • The 24-Month Rehabilitation Expenditure Period: If the 24-month minimum rehabilitation expenditure period for a building originally ends on or after April 1, 2020, and before December 31, 2020, the last day for the owner to incur the minimum rehabilitation expenditures is postponed to December 31, 2020.
  • Reasonable Period for Restoration or Replacement in the Event of Casualty Loss: If a low-income building has suffered a casualty loss and the reasonable period to restore by reconstruction or replacement ends on or after April 1, 2020, and before December 31, 2020, the last day for the Owner of the building to restore the loss by reconstruction or replacement is December 31, 2020.
  • Reasonable Restoration Period in the Event of Prior Major Disaster: if a low-income building, due to a prior Major Disaster, has suffered a casualty loss that would have reduced its qualified basis and if the reasonable restoration period determined by the Agency for the building ends on or after April 1, 2020, and before December 31, 2020, the last day for the owner of the building to complete the repair and restoration is December 31, 2020.
  • The 12-Month Transition Period to Meet Set-Aside for Qualified Residential Rental Projects: the last day of a 12-month transition period for tax-exempt bond projects that ends on or after April 1, 2020, and before December 31, 2020, is postponed to December 31, 2020.
  • The §147(d) Two-Year Rehabilitation Expenditure Period for Bonds Used to Provide Qualified Residential Rental Projects: If a bond is used to provide a qualified residential rental project and if the two-year rehabilitation period for the bonds ends on or after April 1, 2020, and before December 31, 2020, the last day of that period is postponed to December 31, 2020.
  • Grant of Relief Pursuant to §1.42.13(a):
    • Income Recertifications: An owner of a low-income building is not required to perform income recertifications in the period beginning on April 1, 2020 and ending on December 31, 2020. The owner must resume the income recertifications as due after December 31, 2020.
      • E.g., a recertification that is due on November 1, 2020 does not have to be performed. The next recertification will be due on November 1, 2021, keeping in mind that HFAs may have their own requirement in this area.
    • Compliance Monitoring: An agency is not required to conduct compliance monitoring inspections or reviews in the period beginning on April 1, 2020 and ending on December 31, 2020. The Agency must resume compliance monitoring inspections or reviews as due under 1.42-5 after December 31, 2020.
    • Common Areas & Amenities: If an amenity or common area in a low-income building or project is temporarily unavailable or closed during some or all of the period from April 1, 2020 to December 31, 2020, in response to the COVID-19 pandemic, and not due to other §42 noncompliance, this temporary closure will not result in a reduction of the eligible basis of the building.
    • Emergency Housing for Medical Personnel & Other Essential Workers: If individuals who are medical personnel or other essential workers (as defined by State or local governments) provide services during the COVID-19 pandemic, then, for purposes of providing emergency housing from April 1, 2020 to December 31, 2020, for both LIHTC and tax-exempt bond projects, HFAs, Owners, and Operators of low-income housing projects may treat these individuals as if they were Displaced Individuals under Revenue Procedures 2014-49 or 2014-50.

Effective Date: this Notice is effective as of July 1, 2020

Owners and operators of LIHTC and tax-exempt bond projects should consult with their HFAs or Issuing Agencies in order to determine if any requirements in addition to those outlined in this Notice will be implemented.

Latest Articles

RD to Implement HOTMA Income and Certification Rules on July 1, 2025

Although HUD has postponed implementation of HOTMA for its Multifamily Housing Programs until January 1, 2026, the USDA Rural Housing Service (RHS) Office of Multifamily Housing has announced that the Housing Opportunity Through Modernization Act (HOTMA) will take effect on July 1, 2025, bringing significant changes to income calculation rules for multifamily housing programs. Key Implementation Details To accommodate the federally mandated HOTMA requirements, Rural Development published comprehensive updates to Chapter 6 of Handbook 2-3560 on June 13, 2025. All multifamily housing tenant certifications effective on or after July 1, 2025, must comply with the new HOTMA requirements. Recognizing the challenges of the transition period, Rural Development has announced a six-month grace period. Between July 1, 2025, and January 1, 2026, the agency will not penalize multifamily housing owners for HOTMA-related tenant file errors discovered during supervisory reviews. Legislative Background HOTMA was signed into law on July 29, 2016, directing the Department of Housing and Urban Development (HUD) to modernize income calculation rules established initially under the Housing Act of 1937. After years of development, HUD published the Final Rule on February 14, 2023, updating critical regulations found in 24 CFR Part 5, Subpart A, Sections 5.609 and 5.611. The HOTMA changes specifically affecting the RHS Multifamily Housing portfolio are contained in 24 CFR 5.609(a) and (b) and 24 CFR 5.611, which standardize income calculation methods across federal housing programs. Notable Policy Changes Unborn Child Consideration One of the most significant changes involves how unborn children are counted for household eligibility purposes. Under the new rules, pregnant women will be considered as part of two-person households for income qualification purposes, aligning Rural Development policies with other affordable housing programs, including HUD and the Low-Income Housing Tax Credit (LIHTC) programs. However, the household will not receive the $480 dependent deduction until after the child is born, maintaining consistency in benefit distribution timing. Updated Certification Forms Rural Development has released an updated Form RD 3560-8 Tenant Certification, which was initially published on December 6, 2024, and revised on April 18, 2025. The form is available on the eForms Website for immediate use. The previous version of the form has been renumbered as RD 3560-8A and should be used for all tenant certifications effective before July 1, 2025. Implementation Timeline The HOTMA implementation has experienced some delays. Originally scheduled to take effect on January 1, 2025, the Rural Housing Service announced on October 3, 2024, that implementation would be postponed to July 1, 2025, to allow additional time for property owners and managers to prepare. Rural Development initially implemented HOTMA through an unnumbered letter dated August 19, 2024, which outlined the overview and projected timeline for implementation. Industry Impact The HOTMA changes represent the most significant update to federal housing income calculation rules in decades, affecting thousands of multifamily housing properties across rural America. Property owners and managers have been working to update their systems and train staff on the new requirements. The six-month penalty-free transition period demonstrates Rural Development s commitment to supporting property owners through this complex regulatory change while ensuring long-term compliance with federal requirements. Moving Forward Multifamily housing stakeholders are encouraged to review the updated Chapter 6 of Handbook 2-3560 and ensure their staff is adequately trained on the new HOTMA requirements. Property owners should also verify they have access to the updated Form RD 3560-8 and understand the timing requirements for its use. For ongoing updates and additional resources, stakeholders can subscribe to USDA Rural Development updates through the GovDelivery subscriber page. The implementation of HOTMA represents a significant step toward modernizing and standardizing income calculation methods across federal housing programs, ultimately improving consistency and fairness in affordable housing administration.

HUD’s Proposed Rule to Eliminate Affirmative Fair Housing Marketing Plans: A Critical Analysis

Introduction The Department of Housing and Urban Development (HUD) has proposed eliminating the requirement for Affirmative Fair Housing Marketing Plans (AFHMPs), a cornerstone of fair housing enforcement for decades. This proposed rule, published on June 3, 2025, represents a significant departure from established fair housing practices and raises serious concerns about the federal government s commitment to ensuring equal housing opportunities for all Americans. HUD s justification for this elimination rests on six primary arguments, each of which fails to withstand careful scrutiny and analysis. Background on Affirmative Fair Housing Marketing Plans AFHMPs have long served as essential tools in combating housing discrimination by requiring property owners and managers to actively market housing opportunities to groups that are least likely to apply. These plans ensure that information about available housing reaches all segments of the community, not just those who traditionally have had better access to housing information networks. Analysis of HUD s Justifications 1. Claims of Inconsistency with Fair Housing Act Authority HUD argues that its authority under the Fair Housing Act and Executive Order 11063 is limited to the "prevention of discrimination, claiming that AFHM regulations go beyond this scope by requiring outreach to minority communities through targeted publications and outlets. The agency characterizes this as impermissible "racial sorting. This argument fundamentally misunderstands both the nature of discrimination and the historical context of fair housing enforcement. Information disparities have long been one of the most prevalent and effective forms of housing discrimination. When certain groups systematically lack access to information about housing opportunities, the discriminatory effect is equivalent to being explicitly excluded. The failure to provide equal access to housing information is, in itself, a discriminatory act, not merely a neutral information gap. AFHMPs address this reality by ensuring that housing information reaches all communities, particularly those that have been historically excluded from traditional marketing channels. 2. Constitutional Challenges Under Equal Protection HUD contends that AFHM regulations violate the Equal Protection Clause by requiring applicants to favor some racial groups over others. This characterization is both inaccurate and misleading. AFHMPs do not create preferences or favor any particular group. Instead, they ensure equitable access to information by targeting outreach to communities that are "least likely to apply for specific housing opportunities. This principle applies regardless of the racial or ethnic composition of those communities. For instance, housing developments located in predominantly minority neighborhoods are required to conduct affirmative marketing in white communities since white residents would be least likely to apply for housing in those areas. The regulation is race-neutral in its application it focuses on reaching underrepresented groups regardless of their racial identity. This approach promotes inclusion rather than exclusion and advances the constitutional principle of equal protection under the law. 3. Delegation of Legislative Power Concerns HUD s third argument that the Fair Housing Act s authorization of AFHM regulations constitutes an unconstitutional delegation of legislative power represents perhaps the weakest aspect of their legal reasoning. Congress explicitly mandated that affirmative efforts be made to eliminate housing discrimination. As the administrative agency responsible for implementing congressional intent in this area, HUD possesses both the authority and the responsibility to determine the most effective means of carrying out this mandate. The development of specific regulatory mechanisms to achieve Congress s stated goals falls squarely within HUD s legitimate administrative authority and represents appropriate implementation of legislative intent rather than overreach. 4. The "Color Blind Policy Justification HUD frames its opposition to AFHMPs as part of a "color-blind policy approach, arguing that it is "immoral to treat racial groups differently and that the agency should not engage in "racial sorting. This argument mischaracterizes the function and operation of AFHMPs. These plans do not sort individuals by race or treat different racial groups unequally. Rather, they ensure that all groups have equal access to housing information by specifically reaching out to those who are least likely to receive such information through conventional marketing channels. Critically, AFHMPs require marketing to the general community in addition to targeted outreach. This comprehensive approach ensures broad access to housing information while addressing historical information disparities that have contributed to ongoing patterns of segregation. 5. Burden Reduction for Property Owners HUD argues that "innocent private actors should not bear the economic burden of preparing marketing plans unless they have actively engaged in discrimination. This position suggests that property owners should be exempt from fair housing obligations unless they can prove intentional discriminatory conduct. This reasoning effectively provides cover for property owners who prefer that certain groups remain unaware of housing opportunities. The "burden of creating inclusive marketing strategies is minimal compared to the societal cost of perpetuating information disparities that maintain segregated housing patterns. The characterization of comprehensive marketing as an undue burden ignores the fundamental principle that equal housing opportunity requires proactive effort, not merely passive non-discrimination. This represents a retreat to a "wink and nod approach to fair housing enforcement that falls far short of the Fair Housing Act s aspirational goals. 6. Prevention vs. Equal Outcomes HUD s final argument contends that AFHM regulations improperly focus on equalizing statistical outcomes rather than preventing discrimination. This argument creates a false dichotomy between prevention and opportunity creation. AFHMPs exist not to guarantee equal outcomes but to ensure equal opportunity by providing equal access to housing information. When information about housing opportunities is not equally available to all segments of the community, the opportunity for fair housing choice is compromised from the outset. True prevention of discrimination requires addressing the structural barriers that limit housing choices, including information disparities. The Broader Implications HUD s proposed elimination of AFHMP requirements represents a concerning retreat from decades of progress in fair housing enforcement. The proposal effectively returns to an era when discrimination, while technically prohibited, was facilitated through information control and selective marketing practices. The reality of housing markets is that access to information varies significantly across communities. Property owners and managers possess considerable discretion in how they market available units. Without regulatory requirements for inclusive outreach, there are few incentives to ensure that information reaches all potential applicants. Anyone with experience in affordable housing development and management understands that information flow can be deliberately targeted and shaped. This targeting can either expand housing opportunities for underserved communities or systematically exclude them. Marketing strategies can be designed to minimize applications from certain groups while maintaining technical compliance with non-discrimination requirements. Conclusion The six justifications offered by HUD for eliminating AFHMP requirements fail to provide compelling reasons for abandoning this critical fair housing tool. The arguments reflect a fundamental misunderstanding of how housing discrimination operates in practice and ignore the crucial role that information access plays in maintaining or dismantling segregated housing patterns. Rather than advancing fair housing goals, the proposed rule exacerbates existing disparities by removing a key mechanism for ensuring that all communities have equal access to housing information. The elimination of AFHMPs would represent a significant step backward in the ongoing effort to achieve the Fair Housing Act s vision of integrated communities and equal housing opportunities for all Americans. The current proposal suggests an agency leadership more committed to reducing the regulatory burden on property owners than to expanding housing opportunities for underserved communities. This represents a troubling departure from HUD s mission and responsibilities under federal fair housing law. Moving forward, policymakers, housing advocates, and community leaders must carefully consider whether this proposed rule serves the public interest or merely provides cover for practices that perpetuate housing segregation through more subtle but equally effective means.

HUD Inspector General Reports Major Financial Recoveries and Oversight Improvements

Federal watchdog agency identifies nearly $500 million in recoveries while addressing critical housing challenges across America. The U.S. Department of Housing and Urban Development s Office of Inspector General (HUD OIG) has published its semiannual report to Congress, highlighting significant financial recoveries and systemic improvements across federal housing programs during the six-month period that ended on March 31, 2025. Record Financial Impact and Enforcement Actions The HUD OIG s oversight activities generated significant financial returns for taxpayers, with audit and investigative efforts yielding nearly half a billion dollars in recoveries and recommendations. Audit activities alone led to collections of $387.4 million, while identifying an additional $42.3 million in funds that could be better utilized and questioning $8.1 million in costs. Investigative efforts produced equally impressive outcomes, with over $61 million in recoveries and receivables. The enforcement actions were thorough, leading to 36 arrests, 58 indictments, and 92 administrative sanctions, including 60 debarments from federal programs. Among the most notable prosecutions, a landlord received a 17-year prison sentence for fraudulently obtaining federal rental assistance while violating the Fair Housing Act. Similarly, a businessman was sentenced to 17 years for orchestrating a reverse mortgage fraud scheme that specifically targeted elderly homeowners. Addressing Systemic Housing Quality Concerns The report highlights ongoing challenges in maintaining adequate housing conditions within HUD-assisted properties. Inspections revealed that 65% of the observed housing units had deficiencies, with 63 life-threatening issues identified. These findings underscore the continued struggle to ensure that federally subsidized housing meets basic safety and health standards. Under the Rental Assistance Demonstration (RAD) program, initial inspections of converted properties experienced significant delays, with 50% lacking timely management and occupancy reviews. The OIG has recommended improvements to the timing and completion processes of inspections to address these critical gaps. One investigation led to a civil lawsuit against a management company for lead paint safety violations impacting over 2,500 apartments, highlighting the serious health risks faced by residents in certain assisted housing properties. Fraud Risk Management Needs Enhancement The report highlights fraud risk management as a vital area needing attention, especially within large public housing authorities. An audit of the New York City Housing Authority (NYCHA) showed a lack of a comprehensive fraud risk strategy, despite some existing anti-fraud measures. The authority s approach was described as mainly reactive instead of proactive. This finding has led the OIG to recommend evaluating fraud risk management practices at other large public housing authorities across the country, indicating that NYCHA s challenges may reflect broader systemic issues. Progress in Resolving Past Recommendations Collaboration between HUD and the OIG has produced positive outcomes in addressing previously identified issues. During the reporting period, HUD resolved 135 open recommendations, bringing the total number of outstanding recommendations down to 693. This trend shows a consistent decrease in unresolved audit findings. However, although not part of the report, it should be noted that the recent and planned cuts to HUD staff may slow the pace of corrective activity. Since October 2022, the OIG has identified 283 non-monetary benefits resulting from its recommendations, including 77 guidance enhancements, 64 process improvements, 112 increases in program effectiveness, and 30 enhanced accuracies. These improvements highlight the broader impact of oversight activities beyond direct financial recoveries. Challenges in FHA Program Oversight The Federal Housing Administration continues to face challenges in managing counterparty risks with mortgage lenders and servicers. The OIG found that Carrington Mortgage and MidFirst Bank misapplied FHA foreclosure requirements in over 18% and 14% of cases, respectively. Additionally, other lenders, including CMG Mortgage and loanDepot.com, demonstrated deficiencies in their quality control programs for FHA-insured loans. These findings underscore the necessity for improved oversight of the private entities on which HUD depends to effectively deliver housing assistance programs. Disaster Recovery and Grants Management HUD s administration of disaster recovery grants continues to encounter monitoring challenges. Although grantees under the National Disaster Resilience Program faced delays in completing activities, they remain on track to achieve their overall goals. The OIG has recommended enhanced action plans and improved documentation of collaboration with partners. In broader grants management, the OIG identified compliance issues with federal transparency requirements, noting that prime award recipients did not consistently report subawards as mandated by the Federal Funding Accountability and Transparency Act. Technology and Cybersecurity Improvements HUD s information security program has achieved maturity level 3, but it has not yet reached full effectiveness. Penetration testing uncovered significant weaknesses in data protection and website security, prompting recommendations for comprehensive enhancements to safeguard sensitive information and systems. Whistleblower Protections and Transparency The OIG continues to underscore the significance of whistleblower protections in ensuring program integrity. During the reporting period, 10,214 hotline intakes were processed, with 6,631 referred to HUD program offices for action. The Public and Indian Housing office received the highest number of referrals at 5,250, highlighting ongoing concerns in this program area. Notably, the report found no attempts by HUD to interfere with OIG independence, and no instances of whistleblower retaliation were reported, indicating a healthy oversight environment. Looking Forward The semiannual report illustrates both the ongoing challenges that federal housing programs face and the effectiveness of independent oversight in addressing these issues. With nearly $500 million in financial impact and numerous process improvements, the HUD OIG s work continues to yield substantial returns on taxpayer investment while ensuring that federal housing assistance reaches those who need it most safely and effectively. The findings emphasize the crucial role of strong oversight in preserving the integrity of programs that offer housing assistance to millions of Americans while pointing out areas where ongoing attention and enhancement are vital for program success.

HOTMA Compliance Deadline Extended to January 1, 2026 for HUD Multifamily Housing Programs

On May 30, 2025, the Office of Multifamily Housing Programs issued a new Housing Notice extending the mandatory compliance date for the Housing Opportunity Through Modernization Act of 2016 (HOTMA). The previous deadline of July 1, 2025, has now been extended to January 1, 2026, for all owners participating in HUD multifamily project-based rental assistance programs. What This Means for Owners and Agents Full HOTMA compliance is required for all tenant certifications dated on or after January 1, 2026. This includes adherence to both the mandatory provisions and any discretionary policies implemented by owners. Owners and agents may voluntarily adopt HOTMA compliance earlier by utilizing the rent override function in the Tenant Rental Assistance Certification System (TRACS). Interim Compliance Guidance Until a property fully implements HOTMA, HUD advises the following: Continue to follow your current Tenant Selection Plan (TSP) as approved by HUD or your Contract Administrator. Maintain adherence to existing Enterprise Income Verification (EIV) policies and procedures. Ensure any early implementation steps are consistent with TRACS capabilities and accurately documented in tenant files. Key Takeaways New HOTMA compliance deadline: January 1, 2026 Optional early adoption is available through TRACS Existing policies remain in effect until full HOTMA compliance is achieved LIHTC Impact Owners and operators of LIHTC projects should contact the relevant Housing Finance Agency (HFA) for information on the effective date in their respective states. If you have any questions regarding the HOTMA implementation timeline, updating your policies, or the use of TRACS features, please contact our office. We are here to help ensure a smooth transition to full HOTMA compliance.

Want news delivered to your inbox?

Subscribe to our news articles to stay up to date.

We care about the protection of your data. Read our Privacy Policy.