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:
  1. 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;
  2. The IRS should participate in the physical inspection alignment initiative of the Rental Policy Working Group; and
  3. 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.      

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HUD Publishes 2025 Income Limits

On April 1, 2025, HUD published the 2025 income limits for HUD programs and the Low-Income Housing Tax Credit and Tax-Exempt Bond programs. The limits are effective on April 1, 2025. The limits for the LIHTC and Bond projects are published separately from those for HUD programs. For better understanding, LIHTC and Bond properties operate under the Multifamily Tax Subsidy Project (MTSP) limits. These properties are 'held harmless' from income limit (and therefore rent) reductions. This means that these properties may use the highest income limits for resident qualification and rent calculation since the project has been in service. However, it's important to note that HUD program income limits are not 'held harmless '. HUD publishes the 50% and 60% MTSP limits alongside the Average Income (AI) limits, which are set at 20%, 30%, 40%, 50%, 60%, 70%, and 80%. Projects that began service before 2009 may utilize the HERA Special Income Limits in areas where HUD has published such limits. Projects placed in service after 2008 cannot use the HERA Special Limits. Projects in rural areas not financed by tax-exempt bonds can use the higher MTSP limits or the National Non-Metropolitan Income Limits (NNMIL). It is important to note that for 2025, HUD has made changes to the definitions of geographic areas as determined by the Office of Management and Budget (OMB). The counties or towns within certain metropolitan areas may have changed. Owners and managers should consult the HUD Area Definition Report for a list of their areas and their components. The link to the Area Definition Report can be found on the website provided below. Owners of LIHTC projects may rely on the 2024 income limits for all purposes for 45 days after the effective date of the newly issued limits, which ends on May 16, 2025. The limits for HUD programs may be found at www.huduser.gov/portal/datasets/il.html. The limits for LIHTC and Bond programs may be found at www.huduser.gov/portal/datasets/mtsp.html.

Effects of Potential Staffing Cuts on HUD Programs

As the Trump administration moves forward with plans to reduce the federal workforce dramatically, the Department of Housing and Urban Development (HUD), according to recent reporting by the Associated Press, could face potential cuts that could eliminate half of its staff approximately 4,000 positions. Widespread Impact Across Essential Services The proposed reductions would affect numerous critical HUD programs, including disaster recovery efforts, rental assistance, housing discrimination investigations, and support for first-time homebuyers. Housing advocates and former HUD officials have raised substantial concerns that these extensive staffing cuts could greatly hinder or even stop the department s ability to carry out its mission. The official HUD position is that this information "should not be considered final. However, the potential extent of these reductions aligns with the administration s broader goal of reducing government spending. Recently appointed HUD Secretary Scott Turner announced the formation of a Department of Government Efficiency task force inspired by billionaire Elon Musk, while also underscoring the identification of "$1.9 billion in misplaced funds and "$260 million in wasteful contracts. Rental Assistance Programs at Risk The proposed cuts most concerning aspect is their potential impact on the Office of Public and Indian Housing, which could lose half its workforce from 1,529 employees to just 765. This office manages rental assistance subsidies for more than 3.5 million households and supports public housing for approximately 1 million people. Georgi Banna, general counsel for the National Association of Housing and Redevelopment Officials, warns that such reductions could delay payments for the Section 8 voucher program, which provides rental assistance to millions of low-income Americans. Although tenants have certain protections as long as they pay their share of the rent, they could ultimately face displacement if landlords withdraw from the voucher program due to payment issues. Budget Challenges Compound the Problem The potential staffing cuts come at a particularly challenging time as Congress continues to navigate a contentious appropriations process for HUD programs. The House version of the spending bill would boost funding for Housing Choice Vouchers by $115 million, which sounds promising but falls far short of the estimated $4.3 billion increase needed to simply maintain current service levels, according to the Center on Budget and Policy Priorities (CBPP). If the House budget is approved, it will only meet 90% of the need, potentially causing about 283,000 households to lose voucher access what the CBPP has described as the "most severe funding shortfall in the history of the voucher program. 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Turner recently announced on social media that HUD had canceled $4 million in diversity, equity, and inclusion contracts. Uncertainty for Housing Authorities and Vulnerable Populations Potential staffing cuts and budget uncertainties have come together to create a tumultuous situation for local housing authorities. Housing authorities are finding it difficult to provide clear guidance to both families and landlords while anticipating potentially "draconian consequences if significant cuts or a government shutdown happen. The months ahead may pose unprecedented challenges and uncertainty for millions of Americans relying on HUD programs for stable housing, especially those using Section 8 vouchers. As Congress decides whether to pass a bill keeping the government open, the future of these critical housing programs and the millions of Americans who rely on them hangs in the balance. 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All those in the affordable housing industry must reach out to their elected representatives to stress the importance of HUD and its programs to the housing needs of America s most vulnerable populations.

A. J. Johnson Partners with Mid-Atlantic AHMA for December Training on Affordable Housing—April 2025

In April 2025, A. J. Johnson will partner with the MidAtlantic Affordable Housing Management Association for four live webinar training sessions for real estate professionals, particularly those in the affordable multifamily housing field. The following sessions will be presented: April 15: Pets/Pot/Service Animals: Navigating Fair Housing A Comprehensive 90-Minute Webinar for Housing Professionals Join us for an essential training session that tackles three of the most challenging areas in fair housing compliance today. This practical webinar will equip affordable housing providers with clear guidance on: Service and Emotional Support Animals: Learn the crucial legal distinctions between pets and assistance animals, proper verification procedures, and how to handle accommodation requests while complying with FHA regulations. Pet Policy Development: Explore effective strategies for creating and enforcing fair pet policies that address resident needs while considering property management concerns. Medical Marijuana Considerations: Explore the intricate relationship between federal and state laws concerning medical marijuana use in housing, including the requirements for reasonable accommodation. Through case studies, interactive discussions, and expert analysis of recent court decisions, you will gain actionable strategies for confidently addressing these challenging issues. This tool is perfect for property managers, leasing agents, compliance officers, and housing administrators who want to minimize legal risk while creating inclusive communities. April 16: VAWA with Tips on Communicating with Victims - The Violence Against Women (VAWA) Reauthorization Act of 2013 expanded VAWA protections to many different affordable housing programs, including the Low-Income Housing Tax Credit (LIHTC) Program. 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