Low-Income Housing Tax Credit: Some Agency Practices Raise Concerns and IRS Could Improve Noncompliance Reporting and Data Collection
Highlights
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.
Recommendations
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.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | 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. |
In response to our recommendation, as of July 2020, IRS has taken several steps to improve the information it receives on LIHTC noncompliance. First, in 2017, IRS implemented a new database that contains information on the three forms that are the basis of the LIHTC program--information on credit allocation and certification (Form 8609); noncompliance or building disposition (Form 8823); and allocating agencies annual report (Form 8610). As of June 2019, the database contained enough Form 8823s and other forms so that IRS had the ability to run reports on noncompliance issues. To improve consistency across the noncompliance form submissions by allocating agencies, IRS officials reviewed the data to gain a better understanding of each allocating agency's compliance monitoring practices and used this information to determine which agencies may need additional training or monitoring. IRS officials also reviewed data available on the Form 8610s to identify allocating agencies that may need additional support on their compliance monitoring activities. Further, IRS officials presented at several industry and agency meetings to highlight findings from their compliance monitoring review, promote greater consistency across allocating agencies, and highlight best practices. They also provided an update to allocating agencies on the LIHTC database and how IRS plans to review form submissions. Moreover, IRS provided examples of how it has worked with Treasury on Form 8823 guidance clarifications, which are in the process of being formalized. By reviewing trends in noncompliance across the allocating agencies and collaborating with allocating agencies, IRS has taken steps to ensure more consistent noncompliance reporting from the agencies.
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| Internal Revenue Service | 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. |
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.
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| Internal Revenue Service | 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. |
In response to our recommendation, as of July 2020, IRS reviewed available information in HUD's REAC database for physical inspection reports and evaluated its usefulness for IRS's compliance oversight. More specifically, IRS reviewed the type of information collected within the REAC database and how it could be merged with IRS LIHTC data. IRS also reviewed the comprehensiveness of the data for IRS's needs. While IRS officials identified certain limitations of HUD's REAC databases for reassessing reporting categories on the Form 8823 and reassessing categories of noncompliance for audit potential, IRS saw benefits of working with HUD as it updates its physical inspection standards for the REAC program. More specifically, IRS requested to be briefed on the plans for the new physical inspection standards. According to IRS officials, IRS met with HUD in 2019 and 2020 on this effort. IRS officials stated the program analyst plans to monitor changes to HUD's physical inspection standards and, in consultation with IRS counsel and Treasury, determine, how, if at all, they can be used for inspections of LIHTC properties. In addition, in response to our other recommendations, IRS improved its own collection and analysis of noncompliance information submitted by allocating agencies. As of September 2017, IRS implemented a new database that contains information on the three forms that are the basis of the LIHTC program and required that all information from the noncompliance forms be included in the database. Moreover, in 2018 and 2019, IRS updated its guidance to reflect how information from the database could be used and updated categories of noncompliance information that can be reviewed for audit potential. According to officials, IRS's database will be used to identify the most significant noncompliance issues across all the categories and refer them to the examination division to review for audit potential. By assessing available HUD data, continuing to work with HUD, and improving its own LITHC data and processes, IRS is leveraging available information to better understand the prevalence of noncompliance and identify the most significant issues.
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