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

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This conflict stems from the fact that these ordinances may violate four major federal laws: 1. The Fair Housing Act Crime-free ordinances often have a disproportionate impact on protected classes. For example: When these ordinances require eviction based on arrests rather than convictions, they disproportionately affect Black and Hispanic tenants, who statistically face higher rates of police interaction regardless of criminal activity. Blanket policies requiring eviction of an entire household due to one member s criminal activity can discriminate against families with children, female-headed households, and certain cultural groups where extended family living arrangements are common. 2. Title VI of the Civil Rights Act of 1964 Title VI prohibits discrimination in programs receiving federal funds. When municipalities with crime-free ordinances receive federal housing funds, they may violate Title VI if: Their ordinances have disparate impacts on protected classes Implementation decisions are influenced by discriminatory intent or stereotypes about certain neighborhoods or demographic groups 3. The Americans with Disabilities Act (ADA) Crime-free ordinances may discriminate against individuals with disabilities in several ways: Automatic eviction for behavior related to mental health conditions without consideration of reasonable accommodations Policies that penalize multiple emergency service calls, which may disproportionately impact those with chronic health conditions requiring frequent medical assistance Exclusions of individuals with past substance use disorder convictions, despite recovery and treatment 4. The Violence Against Women Act (VAWA) VAWA specifically protects victims of domestic violence, dating violence, sexual assault, and stalking from housing discrimination. Crime-free ordinances often violate these protections by: Requiring eviction when police are called to a property multiple times, discouraging victims from seeking help Failing to distinguish between perpetrators and victims when criminal activity occurs Treating domestic disturbances as "nuisances rather than recognizing them as situations where victims need protection Problematic Practices in Crime-Free Ordinances Collective Punishment: Holding Entire Households Accountable One of the most troubling aspects of many crime-free ordinances is the requirement to evict entire households based on one individual s actions. This approach: Punishes innocent family members who had no knowledge of or participation in criminal activity Creates homelessness risks for vulnerable household members, including children, elderly relatives, and individuals with disabilities Disproportionately impacts communities where multi-generational or extended family living arrangements are cultural norms. Blanket Exclusions Based on Criminal Records Many ordinances include overly broad exclusions for individuals with criminal records: Lifetime bans for certain offenses, regardless of rehabilitation or time elapsed Failure to consider the nature, severity, or relevance of the criminal conduct to tenant suitability No individualized assessment of actual risk to property or other tenants Exclusion Based on Arrests Rather Than Convictions Some ordinances allow or require action against tenants based merely on arrests: Violates the presumption of innocence It has a disparate impact on communities of color, which experience higher rates of arrests that do not lead to convictions Creates housing instability based on unproven allegations rather than established facts Automatic Exclusion for Any Criminal Conviction Overly broad policies that automatically deny housing based on any criminal history: Fail to distinguish between violent crimes and minor offenses Ignore evidence of rehabilitation and the age of convictions Create permanent barriers to housing for individuals who have served their sentences and are working to reintegrate into society. Penalizing Emergency Service Calls Particularly problematic are provisions that treat emergency calls as "nuisances : Discourages tenants from seeking emergency medical assistance Forces vulnerable individuals to choose between needed help and keeping their housing Creates dangerous situations where tenants delay calling for assistance during genuine emergencies. Punishing Victims of Domestic Violence Perhaps most concerning is how these ordinances often penalize victims: Treating domestic violence incidents as "nuisance activities requiring eviction Failing to distinguish between calls made by victims versus perpetrators Creating a situation where victims must choose between enduring abuse in silence or risking homelessness. Legal Protections and Ongoing Developments The legal landscape around crime-free ordinances continues to evolve. In states like Illinois, legislation has been enacted to protect survivors of domestic or sexual violence and individuals with disabilities from being penalized due to calls to police for assistance. The Illinois Department of Human Rights and the UIC Law School Fair Housing Legal Support Center and Clinic have developed a guidebook addressing the fair housing implications of nuisance and crime-free ordinances. In 2024, additional cases have further clarified the legal boundaries of these ordinances: A case against a municipality alleged violations of both the Americans with Disabilities Act and Fair Housing Act for enforcing crime-free housing ordinances that denied tenants with mental health disabilities equal access to emergency response services. The consent decree required the municipality to revise its program rules and enforcement practices and adopt non-discrimination policies. The Department of Justice has increased enforcement actions against localities with discriminatory housing policies, particularly those that disproportionately affect racial minorities, women, and people with disabilities. Recommendations for Landlords If your municipality has implemented a crime-free ordinance that may conflict with federal protections, consider the following steps: 1. Review your lease agreements and policies to identify provisions that may violate federal law, even if required by local ordinance. 2. Consult with a housing attorney familiar with fair housing law and local regulations to understand your specific obligations and risks. 3. Implement individualized assessments rather than blanket policies when evaluating potential tenants with criminal histories. 4. Document all housing decisions with clear, non-discriminatory business justifications. 5. Create explicit exceptions in your policies for domestic violence victims and emergency service calls. 6. Engage with local government by attending city council meetings and advocating for amendments to problematic ordinances. 7. Join or form landlord associations to collectively address concerns with local officials. 8. If necessary, consider seeking a declaratory judgment in court to resolve the conflict between federal and local requirements. 9. Stay informed about new legal developments in this rapidly evolving area of law. Navigating this legal minefield is challenging; however, landlords should prioritize compliance with federal civil rights laws. When local ordinances and federal protections conflict, federal law generally prevails. By taking proactive steps to ensure fair housing practices, landlords can protect themselves from liability while also supporting safe, stable housing for all community members.

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.

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