GAO Issues Second Report on the LIHTC Program, May 2016
person
A.J. Johnson
today
06/13/2016
The United States Government Accountability Office (GAO) recently issued a report to the Senate Judiciary Committee titled "Low-Income Housing Tax Credit - Some Agency Practices Raise Concerns and IRS Could Improve Noncompliance Reporting and Data Collection." This is the second in a series of three reports that the GAO will release on the administration of the LIHTC program.
The GAO was asked to review allocating agencies oversight of the LIHTC program. This report reviews how allocating agencies administer the LIHTC program and identifies any oversight issues. 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 nine agencies were California, Chicago, Illinois, Massachusetts, Michigan, Nevada, Rhode Island, Virginia, and Washington, DC.
As a result of their findings, the GAO recommends that 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 agrees that it should improve its noncompliance data, but also stated that it has to consider resource constraints. HUD supports using its expertise and experience administering housing programs to improve the LIHTC program.
Major findings from the study include the following:
More than 50% of the qualified allocation plans (QAPs) that GAO analyzed did not explicitly mention all selection criteria and preferences that Section 42 of the Internal Revenue Code requires.
Allocating agencies notified local governments about proposed projects as required, but some also require 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 impact on the location of affordable housing.
Allocating agencies can increase (boost) the eligible basis used to determine allocation amounts for certain buildings at their discretion. However, they are not required to document any justification for the increases. The criteria used to award boosts varied, with some allocating agencies permitting boosts for specific types of projects and one allowing boosts for all projects in the state.
In the first report on the LIHTC program (July 2015), the GAO found that IRS oversight of allocating agencies was minimal and recommended joint administration with HUD to more efficiently address oversight challenges. The current report continues to state that IRS oversight is minimal, particularly in the review of QAPs and practices relative to the awarding of basis boosts.
Issues relating to IRS management of noncompliance reports from allocating agencies include:
The IRS provides discretion to allocating agencies for reporting noncompliance data, but does not provide feedback to the agencies about data submissions. Consequently, allocating agencies have been inconsistent in their reporting of noncompliance to the IRS.
The IRS does not use the information it receives from the allocating agencies to identify trends in noncompliance. The report states that the IRS has recorded only about 2 percent of the noncompliance information received since 2009 in its database.
The IRS does not use key information when determining whether to initiate an audit, potentially missing opportunities to initiate LIHTC-related audits.
Findings of Interest in the Report
A number of findings should be of interest to program participants (developers, management companies, investor/syndicators, and HFAs).
54 of the 58 allocating agencies reviewed cited the use of points or thresholds (minimum requirements) to weight, evaluate, and score applications against certain criteria and factors. Over 1/3 of the QAPs reviewed cited letters of support from local governments as a consideration in the awarding of credits. Major scoring criteria in QAPs include the following:
Qualifications of development team: 92%
Cost-effectiveness or cost-containment: 72%
Energy Efficiency: 70%
Prior compliance with the LIHTC program: 70%
Leveraging other federal or state programs: 51%
Project readiness: 50%
Letters of support from local government: 38%
12 agencies actually require local government approval prior to an allocation of credits.
Monetary contributions from local government: 31%
Other local government contributions: 20%
While all agencies must allocate at least 10 percent of credits to qualified nonprofit organizations, some reserve more than 10 percent.
Virginia and Chicago reserve 15% and 30% respectively.
Extended Use Agreements must have a minimum term of 30-years, but some agencies require much longer periods.
California has a minimum extended use period of 55 years, and other agencies such as Virginia, Massachusetts, and Nevada award extra points for longer extended use.
Michigan has restricted owners from using the Qualified Contract process at the end of the compliance period by limiting the ability of owners to remove affordability restrictions.
From calendar year 2009 to April 2016, the IRS has received 214,000 Form 8823s - an average on nearly 27, 000 forms per year).
States vary widely in what they report to the IRS:
California, Virginia, and Rhode Island will not send a Form 8823 for minor violations of the Uniform Physical Conditions Standards (UPCS) - such as peeling paint or missing light bulbs - if the violations were corrected during the inspection.
Michigan, Nevada, and Washington, DC send the form to the IRS for any instance of reportable noncompliance, whether or not the issue was resolved during the inspection. The range of reported violations between the agencies in 2013 was stark:
California reviewed 785 properties and sent 59 8823s;
Chicago reviewed 125 properties and sent one 8823;
Illinois reviewed 232 properties and sent one 8823;
Massachusetts reviewed 212 properties and sent 96 8823s;
Michigan reviewed 929 properties and sent 1,728 8823s;
Nevada reviewed 196 properties and sent 511 8823s;
Rhode Island reviewed 125 properties and sent one 8823;
Virginia reviewed 183 properties and sent 368 8823s; and
Washington, DC reviewed 10 properties and sent 28 8823s.
A number of agencies fail to meet the requirement to submit 8823s to the IRS within 45-days after the deadline for correction. Virginia, Illinois, Michigan, Massachusetts, Rhode Island, and Nevada all meet the deadline, but California submits the forms monthly, Chicago once a year, and Washington, DC biannually (the GAO report did not define whether in this case biannually means twice a year or once every two years (both uses are common). I assume twice a year since the alternative would be ridiculous.
The IRS informed the GAO that the Service is not communicating with allocating agencies regarding form submission practices or the application of the IRS Guide (this comes as no surprise to the agencies).
As of April 2016, the IRS database includes information from only 4,200 of the nearly 214,000 8823s received since 2009 (less than 2%). For this reason, the IRS is unable to provide information on the most common types of noncompliance (although we know from the allocating agencies that physical deficiencies are reported much more often than any other type of noncompliance). The IRS also has no method to determine if issues reported as uncorrected have been resolved or if properties have recurring noncompliance issues.
GAO Recommendations for Executive Action
The GAO is making three recommendations based on this report:
The IRS should collaborate with the allocating agencies to clarify when allocating agencies should report such information on the Form 8823. The IRS and Treasury Department should coordinate the drafting of such guidance to ensure that any new guidance is consistent with Treasury regulations;
The IRS should participate in the physical inspection alignment initiative of the Rental Policy Working Group; and
The IRS should evaluate how the agency could use HUD’s REAC databases, including how the information might be used to reassess reporting categories on the Form 8823 and to reassess which categories of noncompliance information have to be reviewed for audit potential.
It is unlikely that any action will be taken as a result of this report in the short term - certainly not until the third of the expected reports is released, which will probably be in 2017. At that point, we will have a new President and a new Congress and tax reform will be under consideration. It is certain that the GAO findings will be elements of the discussion when deciding how to proceed with the LIHTC program in the future.