A. J. Johnson Consulting Services, Inc.

On January 26, 2022, the Treasury Inspector General (IG) for Tax Administration released a report titled, "Oversight of the Low-Income Housing Tax Credit Program Can Be Improved."

The audit was initiated at the request of the previous Chairman of the Senate Budget Committee. The review assessed IRS procedures and processes to ensure that Housing Credit Agencies (HCAs), building owners, and taxpayers are compliant with the requirements of the LIHTC program.

The report was highly critical of IRS oversight of the program. The Inspector General found that forms submitted for the LIHTC program had significant issues with data reliability, reconciliation discrepancies, and missing first-year elections that increase the risk of undetected errors and noncompliance. In addition, it found nonprofit set-asides were below the minimum requirement, certification discrepancies, and inconsistent reporting of building non-compliance and dispositions.

There were potentially large dollar amounts of questionable LIHTC claims based on information from key forms and schedules submitted to the IRS. For example, approximately 67,000 claims for Tax Years 2015 - 2019 totaling almost $15.6 billion lacked or did not match supporting documentation due to potential reporting errors or noncompliance.

Recent IRS examination activity has not identified significant noncompliance. Only a small number of tax returns claiming the LIHTC are being selected each year for examination, and 33% of those are closed before an examination was conducted. For those examined, most resulted in no additional tax assessment - i.e., no change in the return. According to the Inspector General, this examination no-change rate is significantly higher than the average of similar taxpayers.

For calendar years 2003 - 2019, the IRS conducted compliance reviews on only eight of the 56 HCAs that have tax credit program administrative responsibilities.

Inspector General Recommendations

The report contains seven recommendations that include implementing additional system validity checks to improve the accuracy and reliability of the information in the LIHTC database; establishing an examination selection process for questionable LIHTC claims and allocating additional resources, when available, to allow for increased compliance monitoring reviews of the HCAs.

The IRS agreed with five of the seven recommendations. The IRS disagreed with the recommendation to develop an action plan to identify possible causes and correct reporting errors on LIHTC documents, stating that these reporting errors are corrected through existing procedures. The IRS also did not agree with the recommendation to allocate additional resources to increase HCA compliance monitoring reviews. However, the investigation found that 25 HCAs have been identified for contact, which could take many years based on past resource commitments.

Some Observations About the Report

The report contained some interesting tidbits that are of interest to the LIHTC community, one being a confirmation that to date, most IRS audits have been triggered by the issuance of 8823s. It is also interesting to note that the low level of findings during IRS audits was a criticism of the IG. No consideration was given to the fact that the possible low rate of negative audit findings is due to the high degree of self-policing within the affordable housing industry. The LIHTC program is the most comprehensively supervised affordable housing program in history, with oversight from management, investors, and State and local agencies.

One underlying current running through the report was an indirect criticism of the Housing Credit Agencies. Many cases of state agency failure were noted in the report, which provides the impetus for the recommendation to increase IRS scrutiny of these agencies. Some of the HCA related data includes:

The investigation identified 598 of 730 Forms 8823 originally submitted by the HCAs that reported a building disposition were not received by the LIHTC unit within the required 45 days after the event. All 16 of the amended Forms 8823 were received between 701 to 1,645 days after building disposition. To those of us in the industry, these numbers are not surprising. HCAs can only report building dispositions (e.g., sale, foreclosure, destruction) that they are aware of. Property owners often fail to inform the agencies of these events.
The investigation revealed a weakness in the Form 8823. It was determined that while the law requires 8823s to be sent by the HCAs to the IRS within 45 days after the deadline for owner correction of noncompliance, there is no way to track the 45-day rule. This is because the 8823 only requires the noncompliance date and the correction date. It does not show the correction deadline date established by the HCA.
There were 6,983 original Forms 8823 and 205 amended Forms 8823 with received and building noncompliance dates but no building correction date. Using the noncompliance date when no correction date was provided, the study identified 2,901 of 6,983 original and 100 of 205 amended Forms 8823 that were received over one year from the noncompliance date. For those forms that provided a correction date, the study identified 1,851 of 46,355 original and 37 of 207 amended Forms 8823 that were received over one year from the correction date. It is clear from the data that many HCA are not submitting the 8823s to the IRS in a timely manner.
Reports of noncompliance varied greatly between the HCAs. Incredibly, three HCAs (not identified in the report) have never reported building noncompliance, and six HCAs have years-long gaps between reports of building noncompliance.
The IRS has no enforcement power against the HCAs that submit untimely 8823s and can only encourage timely reporting.
Many HCAs are understaffed and report only egregious noncompliance. While the IRS encourages reporting of all noncompliance, there are no consequences if the HCAs do not report.
The investigation also discovered many errors on Forms 8609, which are used to allocate credits and serve as the taxpayers first year certification. Examples include:
- 2,307 without an address for the building;
- 3,384 without a name and date for the HCA signature, which raises questions about whether credits were actually allocated;
- 4,175 without a building owner name and six with "NO NAME" for building owner name;
- 2,617 without an address for the building owner;
- 1,287 with owner signature dates after the date the form was received by the IRS, including future dates (e.g., February 21, 2047 and May 9, 2061);
- First-year elections are not always being made by owners, including:
  - Election to treat the building as a multiple building project (Line 8b) - 59,867 forms were checked "yes," 4,217 were checked "no," and 4,094 had no box checked.
  - If box 6a or 6d is checked for a newly constructed building (or rehab expenditures), 177 records checked "yes," meaning that the federal proceeds (most likely tax-exempt bonds) would be excluded from eligible basis. 20,239 forms did not contain an election when required and 11,837 contained an answer when not required.
  - Line 10a, Election to begin the credit period the year after the building is placed in service - 21,052 forms had nothing checked.
  - Election for minimum set-aside (Line 10c) - 237 of the forms had no election.
- Despite all the 8609 errors, the number and types of errors made by building owners are not being identified, corrected, or summarized for analysis.

Recommendations & IRS Response

Recommendation #1: Ensure that additional system validity checks are implemented to improve the accuracy and reliability of the information in HCA and building owner portions of the LIHTC database.

IRS Response: IRS agreed and indicated that a system change request was submitted to enhance data input validity checks for Form 8609. The additional validity checks will result in improve accuracy and completeness of the reports. However, due to budget constraints, competing priorities, and resource allocations, the IRS did not agree to ensure additional validity checks for other forms.

Recommendation #2: Establish an effective quality review system for the processing of LIHTC forms received from the HCAs and building owners to identify areas requiring corrective action, employee training, or outreach.

IRS Response: The IRS agreed and will provide additional training on forms processing.

Recommendation #3: Establish an examination (audit) selection process for business owners submitting questionable Forms 8609-A that do not correspond to Forms 8609.

IRS Response: The IRS agreed and indicated that they will develop a process to compare Forms 8609-A with Forms 8609.

Recommendation #4: Evaluate possible revisions to Forms 3800, 8586, and 8609-A to remove the option to make a current year LIHTC claim for a pre-2008 building.

IRS Response: The IRS agreed and will make the recommended form changes.

Recommendation #5: Determine the feasibility of establishing an audit selection process for taxpayers submitting questionable LIHTC claims on Forms 3800 that do not correspond to supporting Forms 8609-A or pass-through Schedules K-1.

IRS Response: The IRS agreed and will make recommendations for a selection process to compare information on the forms.

Recommendation #6: Develop an action plan to identify possible causes and correct reporting errors on LIHTC documents.

IRS Response: The IRS disagreed with this recommendation. The Agency stated that reporting errors on LIHTC documents are corrected through existing processes.

Recommendation #7: Allocate additional resources, when available, to allow for increased HCA compliance monitoring reviews.

IRS Response: The IRS disagreed with this recommendation. The Agency stated that they recognize an oversight responsibility to review the credit allocation practices and compliance monitoring processes of the HCAs. However, they do not plan to commit additional resources to HCA compliance monitoring reviews due to competing resource needs.

Problems with the Report

There are a number of issues with the IG report. To begin with, it significantly overstates the extent of current concerns. The analysis includes records dating back eight years, which is prior to the IRS’s 2017 implementation of a new LIHTC database, which showed significant improvements in tracking compliance.

For example, the IG report indicates a nearly 46% error rate on Forms 8609s submitted by building owners, but only 3% occurred after the 2017 database upgrade. When looking at Forms 8609s submitted by HCAs, the IG identified 13,498 errors, none of which occurred after the new database was in place. When reviewing Form 8823 submissions, the IG reported 2,337 errors, but only 4% happened after the implementation of the new database.

What Can LIHTC Owners Expect Based on the Report?

As with most reports of this type, it will gather dust on IRS office shelves. However, since it was requested by Congress (who holds the IRS purse strings), the Agency will make moves in certain areas.

One will be closer attention to the correlation between 8609-As and 8609s. The IRS is planning on putting procedures in place to improve in this area by February 2023.

The Agency made it clear in their response to the report that they will continue to carefully review 8609s and will return incorrectly completed forms to taxpayers for correction. In addition, the service will increase scrutiny on owners who do not comply with IRS requests relative to document completion.

Ultimately, the report does serve a purpose in that it points out some of the weaknesses with program administration - both at the state and federal levels. These weaknesses have now been pointed out to Congress. Owners and stakeholders in the LIHTC program will be wise to pay attention to the issues noted in this report and work to improve recordkeeping and reporting at the project level. Housing Credit Agencies should use the report as a blueprint for how they may improve their own procedures - especially with regard to the timely reporting of noncompliance.

Treasury Inspector General Issues Report Critical of IRS LIHTC Oversight

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