Tax Policy:

New Markets Tax Credit Appears to Increase Investment by Investors in Low-Income Communities, but Opportunities Exist to Better Monitor Compliance

GAO-07-296: Published: Jan 31, 2007. Publicly Released: Jan 31, 2007.

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The Community Renewal Tax Relief Act of 2000 authorized up to $15 billion of allocation authority under the New Markets Tax Credit (NMTC) to stimulate investment in low-income communities. The act mandated that GAO report on the program to Congress by January 31, 2004, 2007, and 2010. Two subsequent laws authorized an additional $1 billion in NMTC authority for certain qualified investments and extended the program for 1 year with an additional $3.5 billion of authority. This report (1) describes the status of the NMTC program, (2) profiles NMTC program participants, (3) assesses the credit's effectiveness in attracting investment by participating investors, and (4) assesses IRS and the Community Development Financial Institutions (CDFI) Fund compliance monitoring efforts. To conduct the analysis, GAO surveyed NMTC investors, conducted statistical analysis, and interviewed IRS and CDFI Fund officials.

As of January 2007, the CDFI Fund had awarded $12.1 billion of NMTC authority to 179 Community Development Entities (CDE). CDEs that received allocations began making NMTC investments in 2003, and the program has continued to grow since then. Investors use two main investment structures to make NMTC investments: direct investments to CDEs and tiered investments, which include equity investments and leveraged investments, where a portion of the investment amount originates from debt and a portion from equity. Banks and individuals constitute the largest proportion of NMTC investors, though banks and other corporations have made the largest share of NMTC investment. CDEs that received allocations applied for allocations in a competitive selection process and, through fiscal year 2005, most investment from CDEs to low-income communities had been used for either commercial real estate rehabilitation or new commercial real estate construction. The results of GAO's survey and statistical analysis indicate that the NMTC may be increasing investment in low-income communities by participating investors. Investors indicated that they have increased their investment budgets in low-income communities as a result of the credit, and GAO's analysis indicates that businesses may be shifting investment funds from other types of assets to invest in the NMTC, while individual investors may be using at least some new funds to invest in the NMTC. The CDFI Fund and IRS developed processes to monitor CDEs' compliance with their allocation agreements and the tax code. However, IRS's study of CDE compliance does not cover the full range of NMTC transactions, focusing instead on transactions that were readily available, and may not support the best decisions about enforcement in the future. Moreover, IRS and the CDFI Fund are not collecting data that would allow IRS to identify credit claimants and amounts to be claimed.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: During December 2007, IRS analysts obtained demographic information on Community Development Entities (CDEs) participating in the New Markets Tax Credit program from the Community Development Financial Institutions (CDFI) Fund. IRS is using the information as one factor to ensure a representative sample in its third compliance examination round for CDEs participating in the NMTC program. Initial round three selections have been made, and additional selections may be made if needed to balance the sample after the demographic analysis is completed in March 2008. An IRS official estimated that IRS would use the information obtained from the CDFI Fund to select CDEs to review for NMTC compliance by spring 2008 and IRS would initiate audits of the selected CDEs during the summer of 2008.

    Recommendation: To ensure the Internal Revenue Service (IRS) is reviewing the full range of NMTC transactions and that the conclusions of its compliance study are more representative of all CDEs with NMTC allocations, IRS should use CDFI Fund data and the results of its current NMTC compliance study to develop criteria for selecting which CDEs to audit as part of its future compliance monitoring efforts.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: In GAO's January 31, 2010 mandated report on the New Markets Tax Credit (NMTC), we reported that IRS had studied the feasibility of cost effectively monitoring investor compliance by attempting to identify all eligible claimants, even in instances where the original investor sells its equity share in a Community Development Entity (CDE). IRS officials noted that they can use Community Development Financial Institutions (CDFI) Fund data as supplementary information when conducting audits and CDEs maintain records of eligible investors should IRS need to recapture the credits. However, IRS officials concluded that the the potential benefits generated from developing a comprehensive system to track NMTC investor compliance for each NMTC transaction would likely be outweighed by the burden it would place on taxpayers and that existing processes should be adequate to ensure compliance.

    Recommendation: To ensure that eligible taxpayers claim the correct amount of NMTC on their tax returns and IRS is able to identify all tax credit claimants in the event of the credit being recaptured, IRS should work with the CDFI Fund to further explore options for cost effectively monitoring investor compliance and developing a way to identify NMTC claimants, even in instances where the original investor sells its equity share in a CDE, and the amount of qualifies equity investment that each investor made.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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