Low-Income Housing Tax Credit:

Some Agency Practices Raise Concerns and IRS Could Improve Noncompliance Reporting and Data Collection

GAO-16-360: Published: May 11, 2016. Publicly Released: Jun 8, 2016.

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Daniel Garcia-Diaz
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What GAO Found

Allocating agencies that administer the Low-Income Housing Tax Credit (LIHTC) program have certain flexibilities for implementing program requirements and the agencies have done so in various ways. Although GAO found that allocating agencies generally have processes to meet requirements for allocating credits, reviewing costs, and monitoring projects, some of these practices raised concerns:

  • More than half of the qualified allocation plans (developed by 58 allocating agencies) 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 required letters of support from local governments. The Department of Housing and Urban Development (HUD) has raised fair housing concerns about this practice, saying that local support requirements (such as letters) could have a discriminatory influence 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 the justification for the increases. The criteria used to award boosts varied, with some allocating agencies allowing boosts for specific types of projects and one allowing boosts for all projects in its state.

In a July 2015 report, GAO found that Internal Revenue Service (IRS) oversight of allocating agencies was minimal and recommended joint administration with HUD to more efficiently address oversight challenges. GAO's work for this review continues to show that IRS oversight remains minimal (particularly in reviewing allocation plans and practices for awarding discretionary basis boosts) and that action is still warranted to address GAO's prior recommendation. In this report, GAO also identified the following issues related to managing noncompliance information from allocating agencies:

  • IRS provides discretion to allocating agencies for reporting noncompliance data, and has not provided feedback about data submissions. Consequently, allocating agencies have been inconsistently reporting these data to IRS.
  • IRS has not used the information that it receives from allocating agencies to identify trends in noncompliance. GAO's analysis shows that IRS had recorded only about 2 percent of the noncompliance information it received since 2009 in its database.
  • IRS has not used key information when determining whether to initiate an audit, potentially missing opportunities to initiate LIHTC-related audits.

In contrast, HUD collects and analyzes housing data, and through a Rental Policy Working Group initiative, now adds LIHTC inspection results to its database. The IRS division responsible for LIHTC was unaware of this effort and is not involved with the working group. By participating in the working group, IRS could leverage HUD data to better understand the prevalence of noncompliance in LIHTC properties and determine whether to initiate audits.

Why GAO Did This Study

LIHTC encourages private-equity investment in low-income housing through tax credits. The program is administered by IRS and allocating agencies, which are typically state or local housing finance agencies established to meet affordable housing needs of their jurisdictions. Allocating agency responsibilities (in Section 42 of the Internal Revenue Code and regulations of the Department of the Treasury) encompass awarding credits, assessing reasonableness of project costs, and monitoring projects. GAO was asked to review allocating agencies' oversight of LIHTC. 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.

This is a public version of a sensitive report that GAO issued in May 2016 and does not include details that IRS deemed tax law enforcement sensitive.

What GAO Recommends

GAO recommends that 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. IRS agreed it should improve its noncompliance data, but also stated that it had to consider resource constraints. HUD supported using its expertise and experience administering housing programs to improve LIHTC.

For more information, contact Daniel Garcia-Diaz at (202) 512-8678 or garciadiazd@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: In response to this recommendation, as of July 2019, IRS stated that it has taken several steps to improve the consistency it receives on LIHTC noncompliance. IRS has continued communication with allocating agencies, specifically through semi-annual industry conferences, in order to provide clarification and solicit feedback to enhance the consistency of Form 8823 submissions. Additionally, IRS stated that it also plans to use its database of noncompliance information to inform how guidance surrounding the submission of the Form 8823 can be enhanced. Since September 2017, IRS noted that all Forms 8823 have been inputted into its database and it has the ability to run reports on filing trends and noncompliance issues. IRS stated that officials plan to use this information to, among other things, understand reporting habits of allocating agencies and identify if the number of forms an agency sends is not consistent with the number of projects. IRS also stated that it will review guidance for submitting the Form 8823 during FY 2019 due to the feedback from the allocating agencies' identification of best practices for submissions, among other things. We will continue to monitor IRS's progress in implementing our recommendation.

    Recommendation: To receive more consistent information on LIHTC noncompliance, the IRS Commissioner should collaborate with the allocating agencies to clarify when allocating agencies should report such information on the Form 8823 (report of noncompliance or building disposition). The IRS Commissioner should collaborate with the Department of the Treasury in drafting such clarifications to help ensure that any new guidance is consistent with Treasury regulations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: As of March 2017, IRS had implemented our recommendation to include the appropriate staff at the Rental Policy Working Group meetings. IRS officials provided meeting agendas and other documentation to illustrate the staff member's role in the working group.

    Recommendation: To improve IRS's understanding of the prevalence of noncompliance in the program and to leverage existing resources, the IRS Commissioner should ensure that staff from the Small Business/Self-Employed Division participate in the physical inspection alignment initiative of the Rental Policy Working Group.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Open

    Comments: In response to this recommendation, as of July 2019, IRS officials stated that since HUD's database with property inspection data was not complete and contained data from only about 31 allocating agencies, did not cover the same categories on the Form 8823, and contained properties other than LIHTC, it was unclear how the database could be used. We continue to believe HUD's data collection effort has created opportunities to share inspection data with IRS that could improve the effectiveness of reviews of LIHTC noncompliance. For instance, IRS could request property inspection reports by state or local areas to supplement its own data collection and provide additional information on physical inspection findings and verification of tenant incomes to accurately calculate rent. According to IRS, rather than focus on HUD's database, IRS stated that it has taken steps to improve the Form 8823 information into its database. For instance, since September 2017, all Forms 8823 are required to be captured in its database, which will enable the agency to analyze trends in how the information might be used to reassess reporting categories and which categories might be reviewed for audit potential. For example, IRS officials explained how it has created certain reports to track noncompliance, including the number of non-compliance violations by type and allocating agency. Moreover, according to IRS officials, the collection of data from Forms 8823s has also allowed officials to monitor the consistency in how allocating agencies report noncompliance by comparing the number of Forms 8823 submitted to the number of projects subject to compliance monitoring by allocating agency. Those allocating agencies identified as having lower reporting may be targeted for additional oversight and training. We will continue to monitor IRS's progress in analyzing these trends and progress in implementing our recommendation.

    Recommendation: To improve IRS's processes for identifying the most significant noncompliance issues, the IRS Commissioner should evaluate how IRS could use HUD's Real Estate Assessment Center 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.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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