Low-Income Housing Tax Credit: Some Agency Practices Raise Concerns and IRS Could Improve Noncompliance Reporting and Data Collection
Published: 2016-05-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.
section_title: What GAO Recommends
paragraphs: 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.

section_title: Letter
paragraphs: The Low-Income Housing Tax Credit (LIHTC) program, established under  the Tax Reform Act of 1986, is the largest source of federal assistance for  developing affordable rental housing and cost an estimated $8 billion in  forgone revenue in 2015. The program encourages private-equity  investment in low-income housing through tax credits and is administered  by the Internal Revenue Service (IRS) and allocating agencies. The  allocating agencies typically are state or local housing finance agencies,  which are state-chartered authorities established to meet the affordable  housing needs of the residents of their states or local housing agencies  established for large cities, such as New York or Chicago. Each state  receives an annual allocation of LIHTCs, determined by statutory formula  according to its population. Allocating agencies then competitively award  the tax credits to owners of qualified rental housing projects that reserve  all or a portion of their units for low-income tenants.
In July 2015, we reported on how the LIHTC program is administered;  processes for overseeing the program; and how the administration of  other tax credit programs compares with LIHTC. We found that IRS  oversight of the LIHTC program had been minimal, particularly in  monitoring the allocating agencies and assessing their compliance.  Moreover, we found that IRS had neither set goals nor assessed the  performance of the program and its data were not sufficiently reliable to  assess compliance with basic program requirements. We concluded that  IRS’s oversight to identify and address compliance issues had been  minimal because LIHTC has been viewed as a peripheral program for  IRS in terms of mission and priorities for resources. Furthermore, we  concluded that joint administration with the Department of Housing and  Urban Development (HUD) could better align program responsibilities  with each agency’s mission and more efficiently address existing  oversight challenges. Under joint administration, IRS would retain  responsibilities consistent with its mission to enforce tax laws and HUD’s  role could include oversight responsibilities to help address deficiencies  we identified. We suggested that Congress consider designating HUD as  a joint administrator of the program based on its experience in  administering affordable housing programs and working with state and  local allocating agencies.
You asked us to review how the allocating agencies administer the  program and identify any remaining oversight issues. In this report, we  describe how allocating agencies implement federal requirements for (1)  awarding LIHTCs, (2) assessing the reasonableness of LIHTC properties’  development costs and financial feasibility, and (3) monitoring LIHTC  properties’ compliance with program requirements. Additionally, the report  identifies and discusses additional oversight issues relating to these three  areas.
This report is a public version of a sensitive report that we provided to  you. IRS deemed some of the information tax law enforcement sensitive,  which must be protected from public disclosure. Therefore, this report  omits sensitive information about IRS’s process for evaluating certain  compliance information submitted by allocating agencies. Otherwise, this  report addresses the same questions and uses the same overall  methodology as the sensitive report.
To answer these questions, we reviewed Section 42 of the Internal  Revenue Code (Section 42), Department of the Treasury (Treasury)  regulations, and guidance that detail federal requirements for allocating  agencies in administering the LIHTC program. We also interviewed  officials from IRS, Treasury, HUD, and the National Council of State  Housing Agencies (NCSHA) to discuss the role of allocating agencies in  administering the LIHTC program. We conducted a structured analysis of  58 Qualified Allocation Plans (QAP) from 2013, which outline processes  for awarding LIHTCs and compliance monitoring responsibilities. We  analyzed plans from all 50 states, the District of Columbia, Puerto Rico,  American Samoa, Guam, the Northern Mariana Islands, the U.S. Virgin  Islands, and the cities of Chicago and New York. We used a  standardized data collection instrument to gather and analyze information  from the plans on specific selection criteria, established cost limits,  compliance monitoring practices, and other topics. Our QAP analysis did  not capture information from the agencies’ supplemental LIHTC materials,  such as applications and manuals. Appendix I contains additional details  about our scope and methodology.
We used information from the QAPs relating to the allocating agencies  (such as the type of scoring system used for applications and limits on  development costs); other factors such as state population (which affects  the size of the annual LIHTC allocation); and geographic location to select  a nonprobability, nongeneralizable sample of nine allocating agencies for  site visits. Our selected agencies were in California; Chicago, Illinois;  Illinois; Massachusetts; Michigan; Nevada; Rhode Island; Virginia; and  Washington, D.C. During our visits, we interviewed agency officials and  reviewed files for randomly selected housing developments to determine  how each agency addressed federal requirements for awarding LIHTCs,  assessing the reasonableness of development costs, and monitoring  properties’ compliance with program requirements. While the results of  these site visits cannot be generalized to all states, they provided insight  into the ways in which agencies implemented these requirements.
We conducted this performance audit from February 2014 to May 2016 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: State and local allocating agencies are responsible for day-to-day  administration of the LIHTC program based on Section 42 and Treasury  regulations. More specifically, allocating agencies are responsible for (1)  awarding their tax credits to qualifying projects that meet their QAP, (2)  determining the value of the tax credits awarded to projects, and (3)  monitoring project compliance following the award of credits. Figure 1  provides an overview of the key responsibilities of an allocating agency  from application to the end of the compliance period for an LIHTC  development.
subsections: section_title: Requirements for Qualified Allocation Plans and Agency Evaluations and Award Processes
paragraphs: Agencies receive allocations of tax credits and award the credits to  specific projects that meet requirements of Section 42. An allocating  agency develops the QAP and receives approval of the plan by the  governmental unit of which the allocating agency is a part. The agency  then evaluates the proposed projects against the approved QAP. The  QAP also must be developed in accordance with Section 42 requirements  for such plans. Section 42 requires that QAPs give preference to certain  projects; specifically, those that  serve the lowest-income tenants, are obligated to serve qualified tenants for the longest periods, and are located in qualified census tracts and the development of which  contributes to a concerted community revitalization plan.
QAPs also must incorporate certain “selection criteria” (but are not limited  to these criteria). Specifically, under Section 42, the plans must consider housing needs characteristics; project characteristics (including whether the project uses existing  housing as part of a community revitalization plan);  tenant populations with special housing needs; public housing waiting lists;  tenant populations of individuals with children; projects intended for eventual tenant ownership; energy efficiency of the project; and historic nature of the project.
Finally, allocating agencies, when awarding tax credits, are responsible  for meeting other Section 42 requirements relating to developers, the  affordability period of projects, project viability, and written communication  with the public. Specifically, allocating agencies must allocate at least 10 percent of the state housing credit ceiling to  projects involving qualified nonprofit organizations; execute an extended low-income housing commitment of at least 30  years (of which the first 15 years is the compliance period) before a  building can receive credits;  require developers to hire an agency-approved third party to conduct  a comprehensive market study of the housing needs of low-income  individuals in the area to be served by the project before the credit  allocation is made; provide a written explanation to the general public if the agency  makes an allocation that is not in accordance with established  priorities and selection criteria; and notify the chief executive officer (or the equivalent) of the local  jurisdiction where the building is located, and provide the official a  reasonable opportunity to comment on the project.
To select projects for tax credits, allocating agencies receive and evaluate  detailed proposals that developers submit to develop new housing or  acquire and rehabilitate existing housing. The project owners agree to  set aside a certain percentage of the units with rents affordable to  qualifying low-income households for at least 30 years. In return, tax  credit investors can earn a tax credit over a 15-year period (the  compliance period) if they meet the affordability requirements, but can  claim the credit over an accelerated time frame (the 10-year credit  period), beginning in the year in which the property is placed in service  (ready for occupancy) or, if the investor chooses, the succeeding tax  year. IRS can recapture some or all of the credits if requirements during  the compliance period have not been met.
section_title: Requirements for Determining Award Value
paragraphs: The amount of the tax credits awarded to a project generally is based on  the eligible basis (total allowable costs associated with depreciable costs  in the project). Additionally, the allocating agency is to provide no more  credits than it deems necessary to ensure the project’s financial feasibility  through the 10-year credit period. To determine financial feasibility,  Section 42 requires that allocating agencies consider the reasonableness  of developmental and operational costs, any proceeds or receipts  expected to be generated through the tax benefit, and the percentage of  credit amounts used for project costs other than the cost of intermediaries  (such as syndicators). Section 42 also requires an allocating agency to  evaluate available private financing and other federal, state, and local  subsidies a developer plans to use and adjust the award accordingly.
Allocating agencies must review costs to determine the credit amount at  three points in time: application (when the proposal is submitted),  allocation (when the agency commits to providing credits to a specific  project), and placed-in-service (when the project is ready for occupancy  under state and local laws). The allocating agency also must report the  allocated amount of tax credits available over a 10-year credit period for  each building in a project on IRS Form 8609 (credit allocation and  certification form).
section_title: Requirements for Monitoring Project Compliance
paragraphs: After credits are awarded, Treasury regulations state that allocating  agencies must conduct regular site visits to physically inspect units and  review tenant files for eligibility information. As shown in figure 1, initial  inspections must be conducted by the end of the second calendar year  following the year in which the last building of the development was  placed in service. Subsequent inspections must take place at least once  every 3 years, starting from the initial inspection. During the inspections,  allocating agencies must randomly select the units and records to be  inspected and reviewed.
The agencies also have reporting and notification requirements. For  example, allocating agencies must notify IRS of any noncompliance found  during inspections and ensure that owners of LIHTC properties annually  certify that they met certain requirements for the preceding 12-month  period. If a property is not in compliance with the provisions of Section 42,  allocating agencies must provide written notice to owners and file an IRS  Form 8823 (report of noncompliance or building disposition) no later than  45 days after the end of the correction period, whether or not the  noncompliance or failure to certify has been corrected. Agencies also  must report a summary of compliance monitoring activities annually on  IRS Form 8610 (low-income housing credit agencies report).
The design of the LIHTC program (such as the roles of investors and  syndicators) can result in other entities providing additional types of  monitoring of LIHTC projects. Investors and syndicators may provide  project oversight to help ensure that they receive the expected tax credits  over the designated period. For instance, investors and syndicators may  maintain a list of properties (based on identified performance measures)  to more closely monitor.
section_title: IRS Offices Involved in LIHTC Program Oversight
paragraphs: IRS administers the LIHTC program primarily within one division, with  assistance from other offices and units.
The Small Business/Self-Employed Division primarily administers the  LIHTC program. One full-time program analyst develops internal  protocols, provides technical assistance to allocating agencies, and  provides community outreach to industry groups and taxpayers  (developers/owners and investors).
The Low-Income Housing Credit Compliance Unit in Philadelphia,  Pennsylvania, assists in determining if tax returns may warrant an  audit and populates IRS’s Low-Income Housing Credit database. The  database has been used to record information from certain IRS forms  that allocating agencies or taxpayers submit (such as Form 8823,  which we discuss later in this report).
The Office of Chief Counsel provides technical assistance for the  LIHTC program and determines the amount of credit available for the  national pool. The pool consists of additional credits that qualified  states can use in a calendar year—these are credits that were unused  in the prior year and thus “carried over” into a new year.
section_title: Agencies Implemented Requirements for Allocation Plans and Award Credits in Varied Ways; IRS Has Not Reviewed the Plans or Agency Criteria
subsections: section_title: Most Agencies Did Not Explicitly Cite All Required Preferences and Selection Criteria in Qualified Allocation Plans
paragraphs: Based on our review of 58 QAPs and our site visits, we found the QAPs  did not consistently contain, address, or mention preferences and  selection criteria required in Section 42, but we found that some allocating  agencies incorporated the information into other LIHTC program  documents, or implemented the requirements in practice. Specifically, 23  of 58 QAPs we analyzed contained references to all required preferences  and selection criteria. Of the 35 QAPs that did not contain references to  all required preferences and selection criteria, 5 were from the selected  agencies that we visited. All five of these agencies provided us with  documentation that demonstrated that these requirements were being  implemented. For example, Michigan’s scoring criteria attachment to their  LIHTC application included several requirements that were not found in  their QAP. As another example, although Nevada’s QAP did not include  selection criteria related to public housing waiting lists, officials from the  agency illustrated how they met this requirement by including an  attachment to their application package that requires the developer to  certify that it will notify public housing agencies of the project’s availability  for tenants on public housing waiting lists. The remaining 30 agencies  (which we did not visit) also may have documented the information  elsewhere. For example, for several plans with missing Section 42  requirements, we were able to find evidence that these required items  were listed or referenced in other publicly available sources.
Consistent with our previous report, IRS officials stated that they did not  regard a regular review of QAPs as part of their responsibilities as  outlined in Section 42 and therefore, did not regularly review the plans.  IRS officials said that allocating agencies have primary responsibility to  ensure that the plans meet Section 42 preferences and selection criteria.  According to Section 42, allocating agencies must use a QAP that has  been approved by the governmental unit of which the agency is a part but  the Code does not specify that the unit must check for all required  preferences and selection criteria. IRS officials noted that review of a  QAP to determine if the plan incorporated the elements specified in  Section 42 could occur if an allocating agency were to be audited. IRS  has conducted seven audits of allocating agencies since the inception of  the program and found issues related to QAPs, including missing  preferences and selection criteria, lack of an updated plan, and incorrect  paraphrasing of Section 42 requirements. For these audits, IRS  recommended that the agencies update their QAPs to address the  identified deficiencies. As a result of IRS’s lack of regular oversight of the  allocating agencies, we concluded in July 2015 that IRS is not well  positioned to provide this type of oversight because of its tax compliance  mission and recommended that Congress consider designating HUD as a  joint administrator of the program to better align program responsibilities  with each agency’s mission and more efficiently address existing  oversight challenges, including a lack of regular review of QAPs.  However, to date, no action has been taken to address this  recommendation.
section_title: Agencies Have Flexibility on Methods for Evaluating Applications, and Nearly All Use Points or a Threshold System
paragraphs: While Section 42 specifies some selection criteria (such as project  location, tenant populations with special housing needs, and the energy  efficiency of the project), it also more broadly states that a QAP set forth  selection criteria “which are appropriate to local conditions.” As a result,  allocating agencies have the flexibility to create their own methods and  rating systems for evaluating applicants.
Fifty-four of the 58 QAPs we reviewed cited the use of points or  thresholds (minimum requirements) to weight, evaluate, and score  applications against certain criteria and factors (see table 1). Nearly all  the QAPs we reviewed referenced scoring criteria for the qualifications of  the development team. For example, allocating agencies can award  points based on the team’s demonstrated successful experience in  developing tax credit projects, as well as the physical and financial  condition of other properties they developed. Agencies also commonly  used energy efficiency as a criterion. This category encompassed green  building practices, including the design of buildings in accordance with  green standards, as well as use of energy- and water-efficient fixtures.  Additionally, over one-third of the QAPs reviewed cited letters of support  from local governments. (We discuss letters of support in more detail in  the next section.)
Allocating agencies typically ranked applications and reserved credits  based on the needs of the state after scoring applications. Several  allocating agencies with which we met said they have established  allocation pools based on the geographic area of the project or  development characteristics to help ensure that affordable housing needs  are met in those areas. If applications receive the same score, these  allocating agencies have established different kinds of tiebreakers to  decide which applicant would receive the tax credits. For example, one of  California’s tiebreakers is a ratio that compares funds from federal or local  government subsidies a developer expects to finance the project with  total development costs.
Allocating agencies also can implement a qualitative evaluation system  that uses rankings and recommendations to evaluate applications. For  example, the allocating agency from Chicago reviews submitted  applications using internal guidelines based on the agency’s underwriting  standards and project feasibility criteria, and chooses which  developments to recommend for LIHTC awards. Two of the nine agencies  we visited that used a qualitative ranking or recommendation-based  system in 2013 noted that they were considering (Chicago) or had  already switched (Rhode Island) to a point-based scoring system.
Some allocating agencies we visited evaluate applications with the goal of  selecting projects for which to reserve future years’ credits, a practice  termed “forward reserving.” While Section 42 and Treasury regulations  allow such reserving, credits only can be allocated to projects in the  calendar year in which the projects are placed in service. Officials from  California noted that forward reserving helped ensure the agency would  be eligible for the national pool of tax credits. Other agencies noted that  they reserved credits for planning purposes. For example, Chicago’s  allocating agency has decided to reserve 5 years’ worth of credits to build  a pipeline of projects with which to work. Chicago officials stated that a  multiple-year queue allows them to better plan their allocations based on  affordable housing needs in their jurisdiction. Because of this practice,  Chicago does not hold competitive funding rounds every year.
section_title: In Addition to Notifying Affected Officials of Planned Projects, Some Agencies Required Local Letters of Support Raising Fair Housing Concerns That Are Being Litigated
paragraphs: According to Section 42, allocating agencies must notify the chief  executive officer (or the equivalent) of the local jurisdiction in which the  project is to be located, and provide the official with a reasonable  opportunity to comment on the proposed project. Some agencies also  imposed an additional requirement of local letters of support that have  raised fair housing and other concerns. For example, some allocating  agencies give points to developers that have letters of local government  support as part of their application. These agencies require a signed letter  of support (from a chief elected or administrative official of the community  in which the project would be sited) that specifically endorses the  proposed project.
Based on our review of 58 QAPs, we found that 12 agencies noted that  their review or approval of applications was contingent on letters of  support from local officials. Another 10 agencies awarded points for  letters of local support. Six of the nine agencies we visited had selection  criteria in their 2013 QAPs that stated that letters of local support would  affect the agency’s review of the application or result in point awards or  deductions. According to officials from these six agencies, there are  various advantages to using this criterion. For example, officials from  Massachusetts told us the letters indicate a project will move more quickly  through the development process, which includes local zoning and  permitting, than a project without local support. However, the officials also  said that an applicant could be awarded credits without a letter if all other  threshold and scoring requirements were met. Furthermore, officials from  Chicago’s allocating agency noted that the letters were evidence of  support for the proposed development from the surrounding community  and they continued to use the letters as a threshold item upon which tax  credit awards were based.
Four of the allocating agencies we visited that used letters of support as  scoring criteria in 2013 (Nevada, Rhode Island, Virginia, and Washington,  D.C.) had concerns with this additional requirement and took steps or  were planning to change how the letters were used for LIHTC projects.  For example, officials from Virginia’s allocating agency noted that they  stopped awarding points for the letters after being notified that local  officials were choosing developments they wanted to support based on  personal preferences. As of 2014, Virginia stopped awarding points for  local letters of support but began deducting up to 25 points for negative  letters if, after further analysis, the state determined the claims of  negative effect were valid. Additionally, officials from Nevada said that  they changed their requirements because they became aware of the  difficulties developers in rural areas faced in receiving letters of support  (due to local officials’ fear of losing elections if affordable housing were  built in their districts). As of 2015, Nevada no longer required letters of  local support; instead the agency notifies local jurisdictions and provides  them with an opportunity for comment.
In Texas, concerns also have been raised about the requirement, but its  allocating agency continues to require letters of support. Specifically, in  2013, the state’s Sunset Advisory Commission recommended eliminating  letters of support from state senators and representatives because the  commission believed the letters gave too much power to officials far  removed from the process. In 2010, a Texas developer was convicted  on corruption charges, which included supplying a below market-rate  apartment to a state representative in exchange for the representative’s  support for the developer’s projects.
There is also ongoing litigation about the requirement for letters of local  support that alleges that Treasury did not issue any regulations to prevent  state actions that contribute to perpetuating racial segregation of LIHTC  units and that this is a violation of its obligation to affirmatively further fair  housing under the Fair Housing Act. The litigation specifically alleges  that in 2013 the Texas legislature enacted two statutes that give  substantial control over the location of LIHTC projects to local municipal  and county government, one of which requires the allocating agency to  provide a high number of points to developers that receive the explicit  approval of the relevant municipal or local government. According to the  lawsuit, Section 42 gives Treasury the authority to regulate such local  government restrictions, but the agency has not issued regulations or  otherwise prevented states from enacting such policies. Officials from  Treasury’s Office of Tax Policy said they could not comment on ongoing  litigation.
Moreover, research conducted by HUD and others has analyzed how  scoring criteria (like letters of local support) can influence project location  and HUD officials have expressed fair housing concerns about these  letters. Specifically, officials from HUD’s Office of Fair Housing and Equal  Opportunity and Office of General Counsel have cited fair housing  concerns in relation to any preferences or requirements for local approval  or support because of the discriminatory influence these factors could  have on where affordable housing is built. In 2013, HUD and other  participants in the Rental Policy Working Group—which was established  by the White House to better align the operation of federal rental policies  across the administration—shared these concerns with Treasury. These  HUD officials suggested that eliminating local approval or support  requirements or preferences from QAPs should be top priorities for  Treasury and IRS, based on fair housing concerns. As of January 2016,  neither Treasury nor IRS had issued any guidance about letters of local  support, and Treasury’s Priority Guidance Plan does not include any  plans to address HUD’s recommendation. Treasury officials said they  could not comment or take action on matters related to the ongoing  litigation. In addition, research from HUD’s Office of Policy Development  and Research has explored the relationship between tax credit allocation  priorities as outlined in QAPs (such as local letters of support or approval)  and the location of LIHTC units. For example, one HUD report found  that certain state QAP prioritization of local approval exhibited increases  in the overall exposure to poverty of LIHTC units. Furthermore, a report  by the Poverty and Race Research Action Council found that local  approval requirements beyond the required Section 42 notification  provide municipalities with an opportunity to “opt out” of developing  LIHTC projects.
section_title: Selected Agencies Implemented Other LIHTC Requirements in Varying Ways
paragraphs: Allocating agencies we visited had processes in place to meet other  Section 42 requirements relating to awarding credits, long-term  affordability of projects, project viability (market studies), and written  explanation to the public.
subsections: section_title: Nonprofit Set-Aside
paragraphs: Allocating agencies must allocate at least 10 percent of the state housing  credit ceiling to projects involving qualified nonprofit organizations. All  nine allocating agencies we visited had a set-aside of at least 10 percent  of credits to be awarded to projects involving nonprofits. Some agencies  choose to reserve more than 10 percent. For example, the allocating  agencies from Virginia and Chicago reserve 15 percent and 30 percent of  their tax credits for qualified nonprofits, respectively. Officials from  Illinois’s allocating agency mentioned that almost every application has a  nonprofit partner and therefore the minimum set-asides are fairly easy to  meet.
section_title: Extended Use Agreement
paragraphs: Allocating agencies must execute an extended low-income housing  commitment of at least 30 years (the first 15 years of which are the  compliance period) before a building can receive credits. Allocating  agencies with which we met also used various tools when awarding  credits to maintain the affordability of LIHTC projects beyond the 30-year  extended-use period. One allocating agency we visited requires  developers to sign agreements for longer extended-use periods, while  some agencies award points to applications whose developers elect  longer periods. For example, California’s allocating agency has a  minimum affordability period of 55 years, 25 years longer than the 30- year requirement. Other allocating agencies, including those from  Massachusetts, Virginia, Nevada, and California, award extra points to  developers that elect affordability periods beyond the 30-year minimum.
Nevada’s allocating agency noted that it was challenging to preserve the  affordability of LIHTC units due to the qualified contract process outlined  in Section 42. Under the process, owners of properties subject to an  extended-use restriction may seek to remove the restriction for  maintaining affordability after the first 15 years (compliance period) by  requesting that the allocating agency find an eligible buyer for the  property. The agency has 1 year to find a potential buyer that will  maintain the property’s affordability and present an offer in accord with  qualified contract provisions. If the allocating agency cannot find a buyer  that will offer a qualified contract, then the current owner is entitled to be  relieved of LIHTC affordability restrictions (which phase out over 3 years  after the 15-year compliance period ends). Officials from Nevada  mentioned that their larger projects (more than 200 units) were at risk of  losing affordability because of the qualified contract process. Specifically,  when the qualified contract price exceeds a development’s market value,  it is difficult for the agency to find a buyer for the above-market price. The  officials suggested that in such cases, the development should be priced  according to the market or fair value price to attract more buyers willing to  preserve the affordability of the properties. One way we observed that  allocating agencies can maintain LIHTC properties’ affordability is to  restrict owners from using the qualified contract process. For example,  in Michigan, the allocating agency has restricted owners from using the  qualified contract process by limiting their ability to remove affordability  restrictions.
section_title: Market Study
paragraphs: Before a credit allocation is made, allocating agencies must receive from  the developer a comprehensive market study of the housing needs of  low-income individuals in the area to be served by the project. An agency- approved third party must perform the study and the developer must pay  for it.
Eight of the nine allocating agencies we visited require the market study  to be submitted with a developer’s application to ensure the agency can  review the study during its evaluation to award and reserve credits. One  agency (Rhode Island) requires the study to be submitted after credits are  reserved, but evaluates it before allocation. Officials noted that their  agency is familiar with state housing needs because the market is small  and a market study is not necessarily needed to make a decision about  reserving credits (versus allocation).
Two of the nine allocating agencies we visited had agency-specific  requirements for procurement of market studies. For example, Michigan  chooses a firm on behalf of the applicant and has the developer pay for  the study. Agency officials noted that this process increases the  independence of the market analysis and lessens any potential conflicts  of interest. Rhode Island also commissions the market study (by itself or  in partnership with the investor).
section_title: Written Explanation to the General Public
paragraphs: According to Section 42, allocating agencies must provide a written  explanation to the general public if they make an allocation not in  accordance with established priorities and selection criteria. The  allocating agencies we visited met this requirement in varying ways. For  example, two agencies, including Michigan, chose to release a  memorandum to the public describing the specific circumstances of an  allocation. The other agency, California, provided us with an example of a  public memorandum detailing how the agency used forward reserving— that year’s credits already were allocated for the area in which the  proposed development would be located—because the agency saw merit  in the proposed development. Virginia made publicly available meeting  minutes that discussed decisions not made in accordance with  established priorities. The remaining six agencies we visited (Chicago;  Illinois; Massachusetts; Nevada; Rhode Island; and Washington, D.C.)  had not issued a public notification because officials said their agencies  had never allocated credits not in accordance with established priorities  and selection criteria.
section_title: Selected Agencies Have Procedures to Assess Reasonableness of Development Costs, but IRS Is Not Well Positioned to Examine How Agencies Award Credit Boosts
subsections: section_title: Selected Agencies Determine Award Amounts for Projects Differently and Use Various Cost Limits and Benchmarks to Determine Reasonableness of Costs
paragraphs: Section 42 states that allocating agencies must consider the  reasonableness of costs and their uses for proposed LIHTC projects,  allows for agency discretion in making this determination, and also states  that credits allocated to a project may not exceed the amount necessary  to assure its feasibility and its viability as a low-income housing project.  Section 42 does not provide a definition or offer guidance on determining  how to calculate these amounts.
All nine allocating agencies we visited require applicants to submit  detailed cost and funding estimates, an explanation of sources and uses,  and expected revenues as part of their applications. These costs are then  evaluated to determine a project’s eligible basis (total allowable costs  associated with depreciable costs in the project), which in turn determines  the qualified basis and ultimately the amount of tax credits to be  awarded.
More specifically, the agencies we visited used different methods for  determining the amount of LIHTCs to award.
Six agencies (California, Illinois, Michigan, Nevada, Virginia, and  Washington, D.C.) determined credit amounts explicitly in their  application reviews by comparing the award amount calculated from  the qualified basis with the amount calculated based on the project’s  existing equity gap and awarding the lesser of the two. In other words,  agencies reviewed cost information to determine the annual amount  of tax credits needed to fill the gap in financing. These six agencies  documented their calculations and award amounts in the project  application and review files.
The other three agencies (Chicago, Massachusetts, and Rhode  Island) determined credit amounts similarly by reviewing financial  information from developers, but did not explicitly compare the equity  gap and qualified basis to determine award credit amounts. Instead,  officials told us that underwriters reviewed this information and  assessed if the amounts were reasonable based on their internal  underwriting criteria to make award decisions.
Section 42 also does not provide a definition of reasonableness of costs,  giving allocating agencies discretion on how best to determine what costs  are appropriate for their respective localities. In addition, Section 42 does  not require criteria for assessing costs to be documented in QAPs. To  update its best practices in light of the Housing and Economic Recovery  Act (HERA) of 2008 and the American Recovery and Reinvestment Act of  2009, NCSHA provided allocating agencies with recommended practices,  including recommendations on cost limits, credit award amounts, and on  fees associated with construction in allocating housing credit and  underwriting projects in 2010. However, allocating agencies have  different ways for determining the reasonableness of project costs. More  specifically, based on our analysis of 58 QAPs and our site visits,  agencies have established various limits against which to evaluate the  reasonableness of submitted costs, such as applying limits on  development costs, total credit awards, developer fees, and builder’s  fees.
Limits to development costs. NCSHA recommends that each  allocating agency develop a per-unit cost limit standard based on total  development costs. Fourteen of the 58 QAPs we reviewed stated  that total development costs, development costs per unit, or  development costs per square foot were assessed against limits the  agencies established for these cost categories. Of the nine agencies  we visited, four noted that their limits for development costs were  benchmarks determined by costs of similar projects, historical pricing,  and other factors. For instance, the Massachusetts QAP contains  recommended per unit costs using cost information from the agency’s  portfolio. The Illinois QAP contains per square foot and per unit cost  limits, set on the basis of historical data and adjusted for inflation  annually.
Limits to total credit award. Similarly, agencies placed limits on the  tax credit award amounts that taxpayers can claim per project. While  NCSHA recommends that credit awards be limited to the amount  needed to fill any financing gap for the project, several agencies had  specific limits in their QAPs. According to our QAP analysis, 39 of the  58 noted such limits either as a specific dollar amount or as a  percentage of the total amount of credits available for a given year.  Officials from one agency told us they do not mention the award limit  in the QAP because they did not want to encourage applicants to  seek the maximum award amount. However, agency officials stated  that they evaluate applications against a general maximum award  amount that they do not publicize. At the nine agencies we visited, the  maximum amount taxpayers can claim over the 10-year credit period  ranged from $1 million to $2.5 million per project.
Limits to fees for developers. The developer fee—payment made to  the developer for its services—is included in the eligible basis.  Because the developer fee is included in the eligible basis from which  the credit award is ultimately calculated, limits on the fee can help  maintain reasonable costs. NCSHA guidance states that the fee  should not exceed 15 percent of total development costs, except for  developments meeting specified criteria (for size, characteristics, or  location) that could cause fees to be higher. Based on our analysis of  2013 QAPs, 40 of 58 agencies specified limits on the value and  calculation of developer fees. Some allocating agencies cited limits as  the lesser of a specific dollar value or a percentage based on the  number of units in a development. For example, the Michigan QAP  notes that developer fees can be no higher than the lesser of 15  percent of total development costs or $2.5 million for buildings with 50  or more units; higher limits (20 percent) may be used for buildings  with 49 units or fewer to create incentives for developers. Other  agencies calculate the fee limit differently, using a percentage of total  development cost minus costs such as acquisition, reserves, or  syndication. Three of the agencies we visited had no developer fee  limits in their QAPs, but two had limits in supplemental documentation  that is publicly available.
Limits to fees for builders. Agencies also may elect to place limits  on builder’s fees. A builder’s fee is a payment made to the builder and  is included in eligible basis from which the credit award is ultimately  calculated. Similar to the limits on the developer fees, limits on  builder’s fees can help maintain costs. Builder’s profit, builder’s  overhead, or general requirements are common components of  builder’s fees. NCSHA recommends that builder’s profit not exceed 6  percent of construction costs, builder’s overhead not exceed 2 percent  of construction costs, and general requirements not exceed 6 percent  of construction costs. NCSHA notes that the limits should not be  exceeded except for developments with characteristics that may  justify higher fees (such as small size or location in difficult  development areas). Based on our QAP analysis, we found that 34 of  58 noted limits on builder’s fees, but the value and calculations varied.  Some agencies elected to aggregate the fee components into one fee  limit and others set limits for each component of the fees.
We also found that few QAPs (4 of 58) cited specific circumstances under  which developments could exceed cost or credit award limits, such as the  developer demonstrating need. However, we found that eight of the nine  allocating agencies we visited had policies where applicants could exceed  limits that were specified in their QAPs or internal documents.
section_title: Selected Agencies Have Different Processes to Meet Regulatory Requirements for Reviewing Costs at Application, Allocation, and Placed-in-Service
paragraphs: Section 42 requires allocating agencies to review cost information and  determine the credit amount at three different points of time: application,  allocation, and placed-in-service and agencies we visited had different  practices for meeting Treasury requirements at each stage.
With regard to reviewing costs at the time of application, as we previously  discussed, all nine agencies we visited require applicants to submit  detailed cost and funding estimates, an explanation of sources and uses,  and expected revenues as part of their applications. The allocating  agencies then evaluate the submitted cost estimates based on their  established limits and benchmarks for reasonableness, and the total tax  credit award amount is calculated.  “Allocation” occurs when a project is selected for a tax credit award and  credits are set aside for that specific developer as work on the project  begins. Based on our site visits and project file reviews, the nine agencies  we visited told us that they would respond in different ways if costs  previously reported in a developer’s application increased.
Five agencies explicitly stated that award amounts would not increase  beyond the amount determined at application, although awards could  decrease if costs were lower than initially estimated.
Four others stated that award amounts could rise after application due  to cost increases.
The “placed-in-service” date is when the first unit of the building is ready  and available for occupancy under state and local laws. Section 42  states that a project must be placed-in-service by the end of the calendar  year in which the tax credits were allocated. A few allocating agencies  require in their QAP that developers submit periodic progress reports to  better ensure that the development will be placed-in-service on time.  According to our QAP analysis, 7 of 58 plans required developers or  owners to submit reports at regular intervals during construction to  monitor progress. Five agencies we visited stated that they monitored  construction progress, and one explicitly described requirements in its  QAP. In addition to progress reports, the others cited practices such as  scheduled meetings with construction staff and visits to project sites as  ways to monitor construction progress to ensure that the placed-in- service deadlines would be met.
If the project cannot be placed-in-service by that deadline, developers can  apply for a “carryover allocation” which, if approved, extends the deadline  to be placed in service. Specifically, the project will have to be placed in  service no later than the end of the second calendar year after the agency  approves the carryover request. Section 42 requires proof that at least 10  percent of reasonably expected basis in the project was spent in the 12  months after the execution of a carryover allocation. Treasury  regulations state that allocating agencies may verify this in several ways,  including having a requirement that projects requesting a carryover  allocation must submit an independent report on the progress of  construction spending to the allocating agency. The procedures we  observed at all nine agencies we visited were consistent with the  requirements and all required a report to document the expenditures.  However, we observed that three agencies required report submission in  fewer than 12 months following allocation, a more stringent time frame  than currently in Section 42. Two of these agencies said their deadlines  were more stringent in order to give them enough time to review costs  and provide developers an incentive to start construction earlier.
section_title: IRS Does Not Review Agencies’ Criteria for Awarding Discretionary Increases, Which Could Result in Oversubsidizing Projects
paragraphs: Section 42 notes that an increase or “boost” of up to 130 percent in the  eligible basis can be awarded by an allocating agency to a housing  development in a qualified census tract or difficult development area.  Although the boost is applied to the total eligible basis (as opposed to the  total credit amount), the credit amount awarded increases. In addition,  HERA amended Section 42 in 2008 and gave allocating agencies the  discretion to designate any building, regardless of location, as eligible for  a boost of up to 130 percent of the eligible basis. Section 42 requires  allocating agencies to find that “discretionary basis boosts” were  necessary for buildings to be financially feasible before granting them to  developers. Section 42 does not require allocating agencies to  document their analysis for financial feasibility (with or without the basis  boost). However, HERA’s legislative history included expectations that  allocating agencies would set standards in their QAPs for which projects  would be allocated additional credits, communicate the reasons for  designating such criteria, and publicly express the basis for allocating  additional credits to a project. In addition, NCSHA recommends that  allocating agencies set standards in their QAPs to determine eligibility  requirements for discretionary basis boosts (those outside of qualified  census tracts and difficult development areas) and make the  determinations available to the public.
According to our QAP analysis, 44 of 58 plans we reviewed included  criteria for awarding discretionary basis boosts, with 16 plans explicitly  specifying the use of basis boosts for projects that need them for financial  or economic feasibility. Additionally, of the 53 project files we reviewed for  cost information during our site visits, 7 received a discretionary basis  boost. The discretionary boosts were applied to different types of  projects (for example, historic preservation projects, projects in high- foreclosure areas, or projects with enhanced environmental standards)  and on different scales (for example, statewide or citywide).
In some cases, discretionary boosts were applied more broadly. For  example, during our file review in Virginia, we found one development  that received a boost to the eligible basis for having received certain  green building certifications, although the applicant did not demonstrate  financial need or request the boost. The allocating agency told us that all  projects that earned the specified green building certifications received  the boost automatically, as laid out in its QAP. As mentioned previously,  Virginia compares (1) the award amount calculated from the qualified  basis with (2) the amount calculated based on the project’s existing equity  gap, and subsequently awards the lesser of the two. In this case,  because the application showed that the project’s equity gap was still less  than the credit amount with the basis boost, the allocating agency  awarded a credit amount equal to the equity gap. In response to our  findings during the file review, officials from Virginia’s allocating agency  said that the agency has since changed its practices to prevent automatic  basis boosts from being applied and now requires additional checks for  financial need for boosts.
Furthermore, one 2013 QAP we reviewed (Arizona) described an  automatic 130 percent statewide boost for all LIHTC developments.  Agency officials told us they first applied the boost in 2009, when credit  pricing was low. According to the officials, the automatic statewide basis  boost remains in effect because officials have made the determination  that nearly all projects will need it for financial feasibility due to limited gap  financing resources. More specifically, resources decreased when the  state legislature decided to use part of the housing trust fund for other  uses. The agency’s 2015 QAP outlines goals for providing low-income  housing in areas with high market demand where the land is frequently  more expensive. All the projects in the most recent competitive funding  round (2015) are expected to receive the 130 percent boost.
Consistent with our previous report, IRS does not review the criteria  allocating agencies use to award the boosts (most of which are found in  their QAPs). IRS also has not provided guidance to agencies on how to  determine the need for the additional basis to make the project financially  feasible. IRS officials stated that Section 42 gives allocating agencies the  discretion to determine if projects receive a basis boost and does not  require documentation of financial feasibility. Additionally, IRS officials  explained that because the overall amount of subsidies allocated to a  state is limited, the inherent structure of the program discourages states  from oversubsidizing projects, since doing so would reduce the amount of  the remaining allocable subsidies and yield fewer LIHTC projects overall  within a state. However, we observed a range of practices for awarding  discretionary basis boosts, including a blanket basis boost that could  result in fewer projects being subsidized and provide more credits than  are necessary for financial feasibility. In addition, because IRS does not  regularly review QAPs, many of which list criteria for discretionary basis  boosts, IRS is unable to determine the extent to which agency policies  could result in oversubsidizing of projects. In our previous report, we  concluded that IRS’s oversight of allocating agencies and the program  was minimal and recommended that Congress consider designating HUD  as joint administrator of the program based partly on its experience in  administering other affordable housing programs. We continue to believe  that if the program were jointly administered, HUD would be in a better  position (given its housing mission) to provide guidance on discretionary  basis boosts and regularly review allocating agencies’ criteria for  awarding them.
section_title: Selected Agencies Had Processes to Monitor Compliance but IRS Collects Inconsistent Information and Uses Little of It to Assess Extent of Noncompliance in the Program
paragraphs: Allocating agencies are responsible for monitoring the compliance of  LIHTC properties and agencies we visited had processes consistent with  Section 42 and Treasury regulation requirements. However, agencies we  visited had varying practices for submitting noncompliance information to  IRS using the Form 8823 (report of noncompliance or building  disposition). Furthermore, when IRS receives forms, it records little of this  information into its database. IRS also does not review forms with certain  noncompliance issues for audit potential. HUD, through the Rental Policy  Working Group, has started to collect physical inspection results of LIHTC  properties electronically, but the division within IRS responsible for the  LIHTC program was unaware of this effort.
subsections: section_title: Selected Agencies Had Processes to Monitor Properties’ Compliance with Program Requirements
paragraphs: Allocating agencies we visited had processes for and conducted  compliance monitoring of projects consistent with Section 42 and  Treasury regulation requirements.
Treasury regulations require allocating agencies to conduct on-site  physical inspections for at least 20 percent of the project’s low-income  units and file reviews for the tenants in these units at least once every 3  years. In addition, allocating agencies must annually review owner  certifications that affirm that properties continue to meet LIHTC program  requirements.
Allocating agencies we visited followed regulatory requirements on when  to conduct physical inspections and tenant file reviews. Based on our site  visits, five of the nine agencies conducted inspections and file reviews  once every 3 years. The remaining four agencies (Chicago, Michigan,  Nevada, and Rhode Island) conducted inspections and file reviews more  frequently than required. Officials from Nevada noted that inspecting  properties annually helped to detect possible issues in properties earlier.  In addition, officials from Chicago, Michigan, and Rhode Island said they  inspect properties more frequently due to monitoring requirements  associated with other public subsidies that funded the development. For  example, projects funded by HUD’s HOME Investment Partnerships  Program (HOME) can require inspections every 1, 2, or 3 years,  depending on the size of the project. Because HOME is often used as  another financing source within an LIHTC development, these agencies  said they chose to inspect projects every year to satisfy both HOME and  LIHTC requirements.
Treasury regulations also allow agencies to delegate compliance  monitoring functions to a private contractor as long as the allocating  agency retains the responsibility for notifying IRS about noncompliance.  Two agencies, Michigan and Massachusetts, contracted monitoring to  third-party firms due to agency preference to use contractors and  resource constraints. In addition, Treasury regulations require that the  allocating agency ensure that its authorized delegate (third-party  contractor) properly performs the delegated functions. Both agencies’  contracts with the third parties outlined responsibilities, time frames, and  performance reports to the allocating agency. For instance,  Massachusetts receives quarterly and annual performance reports for all  inspections and Michigan has contractors upload inspection findings to an  electronic database for review.
Agencies we visited generally used electronic databases to track the  frequency of inspections, file reviews, and certifications, although most  agencies documented these reviews (such as inspection checklists and  file review worksheets) on paper. Based on our review, we found that  seven of the nine agencies maintained databases that compliance staff  used to record inspections and file reviews, follow up on findings, and  track deadlines for owners to correct noncompliance issues. The  remaining two agencies kept and updated spreadsheets that included  similar information. In addition, agencies we visited generally had  processes to help ensure and improve the reliability, accuracy, and  completeness of database information. For example, officials from  Virginia noted that they have started combining databases that contain  information on compliance with databases that contain application  information to make their datasets more complete.
All agencies we visited had inspection and review processes in place to  monitor projects following the 15-year compliance period, as required  under Section 42. As we previously mentioned, allocating agencies must  execute an extended low-income housing commitment to remain  affordable for a minimum of 30 years before a tax credit project can  receive credits. After the compliance period is over, the obligation for  allocating agencies to report to IRS on compliance issues ends and  investors are no longer at risk for tax credit recapture. Four agencies  (California; Michigan; Nevada; and Washington, D.C.) also chose to  reduce various requirements for compliance monitoring in this time frame,  such as the percentage of units sampled or the frequency of review. For  example, during the extended-use period, Michigan officials stated that  they will conduct physical inspections once every 5 years rather than  once every 3 years.
Although investors are not at risk for tax credit recapture after the 15-year  compliance period, agencies we visited have implemented policies to  encourage compliance during the extended-use period. Specifically, all  nine agencies established criteria that deduct points from or affect a  developer’s future application if prior LIHTC developments had  noncompliance issues during and beyond the 15-year compliance period.  The agencies noted that this practice was a useful tool for promoting  compliance as long as developers were interested in future projects.
section_title: Lack of Clear Guidelines on When to Send IRS Noncompliance Information Results in Inconsistent Reporting across Allocating Agencies
paragraphs: Treasury regulations require allocating agencies to use IRS Form 8823  (report of noncompliance or building disposition) to notify IRS of  noncompliance with LIHTC provisions or any building disposition.  Treasury regulations also state that agencies must report any  noncompliance issues of which they become aware, including through  physical inspections and tenant file reviews. The regulations also require  that an allocating agency submit a form regardless of whether the owner  remedied the noncompliance. That is, allocating agencies must send IRS  forms with information on both uncorrected and corrected noncompliance  issues. As of April 2016, IRS had received approximately 214,000 Form  8823s since calendar year 2009 (an average of nearly 27,000 forms a  year).
As shown in figure 2, the form includes information on the number of  LIHTC units in the building, dates of noncompliance, and a list of  categories to describe the type of noncompliance. The form also includes  checkboxes to indicate if the noncompliance was corrected by the end of  the correction period (the time given to the owner to correct the  noncompliance issue) or remained uncorrected.
IRS developed guidelines for allocating agencies to use when completing  the Form 8823, the “fundamental purpose” of which was identified as  providing standardized operational definitions for the noncompliance  categories listed on the form. The IRS guide adds that it is important  that noncompliance be consistently identified, categorized, and reported.  The guide notes that the benefits of consistency included enhanced  program administration by IRS. In addition, according to Standards for  Internal Control in the Federal Government, information should be  recorded and communicated to management and others who need it in a  form that enables them to carry out internal control and other  responsibilities. Management also should ensure there are adequate  means of communicating with, and obtaining information from, external  stakeholders that may have a significant impact on the agency achieving  its goals.
However, agencies we visited had various practices for submitting Form  8823 to IRS, including different timing of submissions and amounts of  additional detail provided. For example, 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  lightbulbs—if the violations were corrected during the inspection.  Officials from these agencies stated they chose not to send forms for  such minor findings because of the administrative burden this creates for  the agency, developers, and IRS. In contrast, Michigan, Nevada, and  Washington, D.C., will send a form (following notification to the owner) for  all instances of reportable noncompliance, whether or not the issue was  resolved during the inspection or the correction period. Partly because of  these different practices, the number of forms the nine agencies told us  they sent to IRS in 2013 varied from 1 to more than 1,700 (see table 2).
Agencies we visited also submitted different amounts of information to  accompany the Form 8823s. According to the IRS guide, agencies do not  have to describe the noncompliance, but if they submit information with  the form, IRS suggests that it is helpful to identify the unit number, the  date out of compliance and the date corrected, and summarize the  problems with a brief description. A majority of the agencies we visited  send attachments when submitting Form 8823. For instance, Virginia  submits the form with an attachment that includes inspection dates, types  of credits, units reviewed, annual amount of allocation, and explanation of  noncompliance. In contrast, Michigan sends its forms with an attachment  that specifies the unit number but not the specific noncompliance issue,  and Washington, D.C. does not send attachments.
The timing of actual submission of forms to IRS also varied among  agencies we visited. Treasury regulations require agencies to file a form  no later than 45 days after the end of the correction period. Six agencies  (Virginia, Illinois, Michigan, Massachusetts, Rhode Island, and Nevada)  followed this time frame and sent forms to IRS on a rolling basis. The  remainder waited until certain points in time to submit the forms. For  example, California, Chicago, and Washington, D.C., sent forms on a  monthly, annual, and biannual basis, respectively. For one of our selected  agencies (Illinois), the timing of submissions to IRS was affected by staff  turnover and the implementation of a new software program. Because of  these changes, officials from this agency noted they had a backlog of  tenant file reviews from 2013 and 2014 to assess for noncompliance and  estimated that they would send Form 8823s to IRS for any previously  identified issues by June 2016.
Once the allocating agencies submit noncompliance information on Form  8823 to IRS, this federal tax information is protected by law. IRS cannot  share the outcomes of the reported issues with the allocating agencies or  any federal agency without taxpayer consent. All allocating agencies  with which we met confirmed that IRS does not provide them with  information about recapture or resolution of issues after a Form 8823 has  been submitted.
Factors that contributed to the variety of agency submission practices  include conflicting guidance, different interpretations of the guidance, and  lack of IRS feedback about agency submissions. For example, although  Treasury regulations require allocating agencies to submit a form for any  violation and regardless of whether the owner remedied the  noncompliance, the IRS Guide for Completing Form 8823 notes that  professional judgment should be used by allocating agency officials to  identify “significant noncompliance issues.” IRS officials told us they are  not communicating with agencies regarding form submission practices or  the application of the IRS guide. Moreover, IRS officials were aware that  agencies might interpret the guidance differently, but were not aware of  the varying interpretations and submission rates among agencies  because, as we describe in more detail in the following section, IRS uses  and analyzes little of the information collected on the Form 8823. Without  IRS clarification of when to send in the Form 8823, allocating agencies  will continue to submit inconsistent noncompliance data to IRS, which will  make it difficult for IRS to efficiently distinguish between minor violations  and severe noncompliance, such as properties with health and safety  issues. Furthermore, collaboration with the allocating agencies and  Treasury would help IRS to obtain stakeholder perspectives about  noncompliance reporting and ensure that any new guidance is consistent  with Treasury regulations.
section_title: IRS Continues to Do Little with the Information It Collects
paragraphs: IRS has assessed little of the noncompliance information collected on the  Form 8823 or routinely used it to determine trends in noncompliance.  Once the allocating agency decides to submit a Form 8823, it must be  mailed to the IRS Low-Income Housing Credit Compliance Unit in  Philadelphia, where tax examiners determine if the form should be  recorded in IRS’s database as well as forwarded for audit potential review  (which we discuss in the following section). IRS’s Compliance Unit  captures little information from the Form 8823 submissions in its database  and has not tracked the resolution of noncompliance issues or analyzed  trends in noncompliance. Consistent with our previous report, during our  visit to the Compliance Unit, we observed that the tax examiners focused  on forms indicating a change in building disposition, such as the  foreclosure of the project, and only entered information from these forms  into the Low-Income Housing Credit database. As of April 2016, the  database included information from about 4,200 of the nearly 214,000  Form 8823s IRS received since 2009 (less than 2 percent of forms  received). Because little information is captured in the Low-Income  Housing Credit database, IRS was unable to provide us with program- wide information on the most common types of noncompliance.
Of the sample of files we reviewed from the agencies we visited, a  majority of project files with Form 8823s filed in 2013 were submitted  because of violations of the UPCS or local standards, a noncompliance  category that tax examiners do not record in IRS’s database. All nine  agencies we visited confirmed that physical inspection findings were the  most common noncompliance issues found during their compliance  reviews and recorded on the Form 8823.
Furthermore, IRS tax examiners noted that there is no system to track the  number and status of “uncorrected” forms (noncompliance not resolved in  a specified correction period) that they receive. That is, IRS has no  method to determine if issues reported as uncorrected have been  resolved or if properties have recurring noncompliance issues.
In addition, tax examiners noted that the different timing of submissions  among agencies further affect their review of these forms. For instance,  agencies that submit forms on a rolling basis require examiners to  reconcile the “uncorrected” forms with the “corrected” forms  (noncompliance was resolved in the correction period and the  “noncompliance corrected” box was checked). Tax examiners noted that  they may receive an uncorrected form for review in the morning mail and  the corrected form for the same building in the afternoon mail; in the  interim, a warning letter would have been mailed to the tax credit investor,  although the issue was ultimately resolved. Tax examiners with whom we  spoke noted that they have observed inconsistencies with submissions  from the allocating agencies. However, consistent with their role in  processing Form 8823s, the tax examiners said that their primary  responsibility was data entry and initial review of the forms rather than  influencing policies or guidance to allocating agencies regarding form  submission.
In our July 2015 report, we found that IRS had not comprehensively  captured information on credit allocation and certification in its Low- Income Housing Credit database and recommended that IRS address  weaknesses identified in data entry and programming controls to ensure  reliable data are collected. In response to our recommendation, IRS  officials cited that they are exploring possibilities to improve the database,  which not only houses allocation and certification information, but also  data from submitted Form 8823s. Specifically, IRS has been considering  moving the database to a new and updated server, which will provide  program managers the ability to more easily review noncompliance  issues. However, this recommendation remains open. Because forms are  not completely entered into the database or submitted electronically, IRS  still cannot analyze noncompliance information over time, by state, by  property, or by developer.
section_title: IRS Bases Its Review for Audit Potential on Incomplete Information
paragraphs: IRS tax examiners are responsible for forwarding forms to be considered  for audit. If IRS tax examiner staff determine that the identified  noncompliance on the Form 8823 may warrant consideration of an audit  of the taxpayer (that is, the project owner claiming the tax credit), they  send the form and supplemental information—known as a “classification  package”—to the one full-time analyst in the Small Business/Self- Employed Division for further review. The analyst then determines the  audit potential. If an audit were needed, the analyst would forward the  package to the relevant IRS audit examination division.
However, some information from the submitted forms is not being  forwarded to the analyst and such information could help identify serious  noncompliance issues in the program. Since 2006, the Philadelphia  Compliance Unit has reviewed Form 8823s and certain issues are to  receive a “mandatory consideration of audit potential.” Tax examiners  told us that they forward forms with noncompliance findings subject to  mandatory consideration to the analyst in the Small Business/Self- Employed Division for review. Two noncompliance categories that are  among the most directly related to the LIHTC program’s principal purpose  of providing affordable housing to low-income tenants are not forwarded  to the Small Business/Self-Employed Division to be considered for audit  potential. Furthermore, if these types of noncompliance findings on the  Form 8823 were forwarded to the analyst, it could lead to the recapture of  credits. Although the Form 8823 is not the only way IRS can identify and  initiate audits of taxpayers who claim LIHTCs, according to IRS officials,  the majority of LIHTC-related audits of taxpayers that IRS conducted  stemmed from these forms.
Standards for Internal Control in the Federal Government state that  information should be recorded and communicated to management and  others within the entity who need it and in a form and within a time frame  that enables them to carry out their responsibilities. While IRS officials  were aware that they were not reviewing forms with certain  noncompliance issues for audit potential, they noted that IRS lacks the  resources for the one Small Business/Self-Employed Division analyst to  review each form it receives and therefore, decisions were made about  which noncompliance issues should be focused on when determining  audit potential and forwarded to the analyst. IRS does not plan on  updating the categories of noncompliance that have to be forwarded to  the analyst in the Small Business/Self-Employed Division, but officials  stated that IRS continuously evaluates how to most effectively apply its  resources and staff to evaluating forms. However, due to inconsistencies  in form submission by allocating agencies, as previously discussed, IRS  practices for forwarding certain forms, and a lack of database entries for  certain categories of findings, the reviews to determine audit potential are  based on incomplete information. Without a better process to gather  consistent noncompliance information from agencies and regularly review  compliance trends, there is a significant risk that ongoing noncompliance  issues in LIHTC properties may not be detected and that appropriate  actions, including recapture of tax credits, will not be taken.
section_title: HUD Expects to Augment Its Databases with LIHTC Information through the Inspection Alignment Initiative, but IRS Was Not Involved in This Effort
paragraphs: While IRS is limited in its ability to identify continuing noncompliance  issues and potential recapture events because it captures and analyzes  little information it collects, HUD is building data on affordable housing  that includes information about LlHTC projects. HUD’s Real Estate  Assessment Center (REAC) already maintains a series of databases with  information about the condition of its affordable housing portfolio,  including a database of physical inspection results and a system to verify  tenant incomes to accurately calculate rents. REAC collects standardized  sets of information from state and local housing agencies responsible for  administering HUD programs and evaluates the data collected to develop  objective performance scores. HUD also analyzes the information for  various purposes. Because the information is collected electronically,  HUD can sort the data by state, inspection score, and property to conduct  trend analyses. HUD can also disseminate information to HUD program  staff and others involved in preserving affordable housing. HUD officials  noted that they use these analyses to provide feedback to states about  the condition of their properties. In addition, HUD officials noted that they  use REAC database information when estimating future funding needs for  affordable housing programs. REAC scores are published quarterly  online, increasing the transparency of information about the condition of  HUD’s housing portfolio. HUD officials noted that inspection findings such  as health and safety deficiencies also are made available through  REAC’s online portal, which state and local agencies and property  owners can access.
In addition to physical inspection information, HUD has experience  maintaining databases to address tenant income and rent issues.  Specifically, REAC maintains other databases that contain information on  tenant income information and the financial condition of multifamily  housing projects. In addition, HUD officials noted that REAC regularly  shares data with HUD’s Office of Policy Development and Research,  which conducts research on housing needs, market conditions, and  outcomes of current HUD programs. According to HUD, intended results  from using REAC databases include increasing the efficiency and  accuracy of income and rent determinations, removing barriers to  verifying tenant-reported information, and reducing the number of  incidents of underreported and unreported household income.
subsections: section_title: HUD Collection of LIHTC Data Likely Will Increase Due to Inspection Alignment Initiative
paragraphs: HUD’s involvement in collecting LIHTC program information likely will  increase due to the use of the REAC physical inspection database in the  Rental Policy Working Group’s inspection alignment initiative. Although  the Rental Policy Working Group is working to address 10 areas for  improving collaboration and aligning federal rental policy, the physical  inspection alignment initiative has been one of the most active efforts.  Because properties that have multiple federal funding sources may be  subject to several physical inspections with different standards, the  working group has an initiative to align inspection standards, reporting of  results, frequency, and sample size of units to reduce the number of  duplicative federal physical inspections for these properties. In particular,  the initiative focuses on reducing the number of duplicative inspections for  HUD, the Department of Agriculture (USDA), and the LIHTC program  properties. In 2011, the working group launched a pilot program for  aligning inspections of such properties, including those subsidized with  LIHTCs. As of April 2016, HUD noted that 31 states were participating in  the physical inspection pilot and that the REAC physical inspection  database has been used to capture the inspection information from these  states. Further, HUD officials expect participation in the pilot to eventually  include all states.
To bolster its data collection effort, HUD officials also said they plan to  collect physical inspection data from the pilot states for properties solely  subsidized by LIHTC. HUD officials noted several advantages of adding  LIHTC inspection data to the REAC database, including the ability for  HUD to determine regional trends in new construction or rehabilitated  projects, analyze information about the types of tenants being served by  the program, assess the location of LIHTC properties, and track physical  inspection noncompliance trends within the program. HUD officials said  this initiative will be completed in phases to address technology and data  quality concerns. HUD officials noted that most allocating agencies do not  have electronically generated inspection reports and HUD has been  working to determine the best method for incorporating this information in  the REAC database. HUD completed testing of the electronic collection of  inspection reports of properties solely subsidized by LIHTC in March 2016  and plans to expand the collection of LIHTC inspection information  throughout 2016. HUD officials told us that if asked, they would provide  IRS with access to the database.
section_title: IRS Division Responsible for LIHTC Not Involved in Alignment Initiative and Unaware of Data Collection Initiatives for Rental Housing
paragraphs: IRS is responsible for administering the LIHTC program, but its primary  division overseeing the program currently is not involved in interagency  efforts to modernize, standardize, and improve compliance monitoring of  properties. IRS officials from the Small Business/Self-Employed Division  told us that they were not aware of HUD REAC’s databases, capabilities,  or ongoing efforts to collect LIHTC inspection information through the  Rental Policy Working Group. While they stated that the previous analyst  was involved in the group’s early planning efforts, the Small  Business/Self-Employed Division has not participated since that analyst  retired and has no plans to participate in any new working group  initiatives because statutory restrictions prevent them from sharing data  collected on the LIHTC program with other federal agencies.  Furthermore, although Treasury has been involved with the inspection  alignment, officials noted that IRS’s primary role has been for the Chief  Counsel to provide legal authority for LIHTC property inspections to be  done using REAC inspection standards.
Standards for Internal Control in the Federal Government state that  management should ensure there are adequate means of communicating  with, and obtaining information from, external stakeholders that may have  a significant effect on the agency achieving its goals and that effective  information technology management is critical to achieving useful,  reliable, and continuous recording and communication of information.  The Rental Policy Working Group aims to provide a forum for agencies to  collaborate and achieve alignment of federal inspections of rental  properties, but lack of participation by the Small Business/Self-Employed  Division has resulted in IRS not being able to leverage the progress made  by the working group. As we previously mentioned, IRS cannot easily  discern noncompliance in the LIHTC program due to the small amount of  information inputted into its database, and officials cited that IRS is  considering moving the database that houses Form 8823s, among other  information, to a new and updated server. However, in conjunction with  the working group, HUD, USDA, and the participating allocating agencies  have been working to produce and compile consistent, electronic LIHTC  inspection information. Having the Small Business/Self-Employed  Division participate in the working group provides IRS with opportunities  to use compliance data from HUD’s database. This information and  further collaboration with HUD would help IRS better understand the  prevalence of noncompliance in LIHTC properties and reevaluate how the  Form 8823 can be modified to better capture the most significant  information from allocating agencies as well as how IRS determines  which types of noncompliance issues should be considered for audit  potential.
section_title: Conclusions
paragraphs: Although allocating agencies play a key role in allocating tax credits,  determining the reasonableness of development costs, and monitoring  project compliance, IRS is the federal entity responsible for monitoring the  agencies and enforcing taxpayer compliance. IRS oversight of allocating  agencies continues to be minimal, particularly in reviewing QAPs and  allocating agencies’ practices for awarding discretionary basis boosts. As  we concluded in our July 2015 report, although LIHTC is the largest  federal program for increasing the supply of affordable rental housing, it is  a peripheral program for IRS in terms of resources and mission. Without  regular monitoring of allocating agencies, IRS cannot determine the  extent to which agencies comply with program requirements. As a result,  we continue to believe, as we suggested in 2015, that Congress should  consider designating HUD as a joint administrator of the program  responsible for oversight due to its experience and expertise as an  agency with a housing mission. For example, applying HUD’s experience  in administering affordable housing programs to address areas such as  QAP review, federal fair housing goals, and tenant income and rent  issues would provide information, analysis, and potentially guidance on  issues that apply across all allocating agencies.
Our work for this review highlights the need for clarification to guidelines  on submitting noncompliance information as well as further collaboration  with HUD and other federal agencies to help IRS improve functions  related to tax enforcement. The reasons for inconsistent reporting of  noncompliance on Form 8823 include conflicting guidance, different  interpretations of the guidance, and lack of IRS feedback about agency  submissions. Clarifying what to submit and when—in collaboration with  the allocating agencies and Treasury—could help IRS improve the quality  of the noncompliance information it receives and help ensure that any  new guidance is consistent with Treasury regulations. In addition, IRS has  not taken advantage of the important progress HUD has made through  the Rental Policy Working Group to augment its databases with LIHTC  property inspection data. This data collection effort has created  opportunities for HUD to share inspection data with IRS that could  improve the effectiveness of reviews for LIHTC noncompliance. However,  the IRS division managing the LlHTC program is not involved in the  Rental Policy Working Group. Such involvement would allow IRS to  leverage existing resources, augment its information on noncompliance,  and better understand the prevalence of noncompliance. Specifically, IRS  is missing an opportunity to identify pertinent information on LIHTC  properties in REAC databases that could help IRS reevaluate how the  Form 8823 can be revised to better capture the most significant  information from allocating agencies. The information also could help IRS  reevaluate which categories of noncompliance should be further reviewed  for audit potential.
section_title: Recommendations for Executive Action
paragraphs: GAO is making the following three recommendations:  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.
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.
To improve IRS’s processes for identifying the most significant  noncompliance issues, the IRS Commissioner should evaluate how IRS  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.
section_title: Agency and Third- Party Comments and Our Evaluation
paragraphs: We provided a draft of this report to IRS, HUD, and Treasury for their  review and comment. IRS and HUD provided written comments that are  reprinted in appendixes II and III. Treasury did not provide any comments  on the findings or recommendations. All three agencies provided  technical comments that were incorporated, as appropriate. We also  provided a draft to the National Council of State Housing Agencies  (NCSHA), a nonprofit organization that represents the allocating  agencies, for its review and comment. NCSHA provided written  comments that are reprinted in appendix IV.
IRS agreed that it should improve noncompliance reporting and data  collection, but added that it would have to consider whether it has the  resources to implement the recommendations. For example, IRS wrote  that it would commit staff time to attend a few of the Rental Policy  Working Group meetings to ascertain whether participation would be  cost-effective. IRS noted that the working group was established to  address fair housing concerns and cannot address tax matters. The  Rental Policy Working Group is addressing 10 areas of concern, including  fair housing compliance, for improving collaboration and aligning federal  rental policy. However, the pilot to reduce the costs and increase the  efficiency of physical inspections has been one of the most active efforts  undertaken by the Rental Policy Working Group to date. Moreover, as  noted in this report, the physical condition of projects is a component of  program compliance, which affects taxpayers’ eligibility to claim the tax  credit. IRS also stated that the REAC information is limited because not  all the states are involved with the data collection effort and the REAC  database contains properties that are not LIHTC properties. Although not  all states are involved in the pilot to align physical inspections, the  number of participating states has grown from 6 in 2011 to 31 in 2016.  HUD officials expect participation in the physical inspection pilot to further  expand and eventually include all states. HUD also plans to expand the  electronic collection of inspection reports of properties solely subsidized  by LIHTC. As we state in the report, IRS could have a better  understanding of the prevalence of noncompliance by using REAC’s  computerized data on and analysis of the physical condition of  properties—a capability that IRS does not currently have. It could also  help IRS evaluate how the Form 8823 can be revised to better capture  noncompliance information from allocating agencies and help IRS  determine which categories of noncompliance should be further reviewed  for audit potential.
While we understand that IRS has limited resources, leveraging HUD’s  work with the Rental Policy Working Group pilot and accessing REAC’s  computerized system could result in cost savings. IRS noted that it  provides extensive information to allocating agencies through its audit  technique guide, but, as we noted in the report, allocating agencies have  been interpreting the guide differently, which results in the agencies  inconsistently reporting the data to IRS. Additionally, allocating agencies  send thousands of Form 8823s to IRS’s Low-Income Housing Credit  Compliance Unit in Philadelphia that are not entered into a database or  considered for audit each year. Instead, as we note in our report, many of  these files are held for 3 years at the Compliance Unit and then moved to  the Federal Records Center for another 15 years before being destroyed.
Using REAC’s database with assistance from HUD could allow IRS to  analyze noncompliance information over time, by state, by property, or by  developer, which are capabilities currently unavailable to IRS.
In HUD’s comments, it stated that with regard to our July 2015  recommendation calling for enhanced interagency coordination, it  remains supportive of mechanisms to use its expertise and experience  administering housing programs to enhance the effectiveness of LIHTC.  HUD stated that it will continue its work in areas such as fair housing and  physical inspection protocols in order to help the LIHTC program perform  more effectively. As our report noted, applying HUD’s experience in  administering affordable housing programs to address areas such as  QAP review, federal fair housing goals, and tenant income and rent  issues could provide information, analysis, and potentially guidance on  issues that apply across all allocating agencies.
In its comments, NCSHA reiterated its disagreement with our previous  recommendation to Congress, noting that introducing HUD as a co- administrator would reduce program effectiveness or potentially result in  HUD micromanaging allocating agency decisions. We disagree because  the findings from this report highlight specific areas in which HUD would  enhance the administrative support and oversight of the program from a  federal level. For example, this report shows that HUD could apply its  experience in administering affordable housing programs—including  collecting physical inspection data, analyzing noncompliance trends, and  reviewing fair housing issues—that could result in guidance to support the  work done at the allocating agencies. IRS would still retain all  responsibilities related to tax law enforcement. Further, while we did not  make recommendations directly to the allocating agencies, our  recommendations to IRS reflect concerns about some state practices that  we observed, including the missing QAP items and the use of an  automatic basis boost.
NCSHA also noted that it encourages GAO and others to view the QAPs  broadly as a collection of documents that also include other related  publicly available documents and allocation practices by the agencies.  We recognize that the details of each required preference and selection  criterion may be described in more detail in other documents. However,  the QAP is the sole document required by Section 42, and we maintain  that the plans should be consistent in meeting federal requirements and  transparent about an allocating agency’s practices for awarding credits to  projects. Additionally, we note in our report that IRS does not regularly  review QAPs, but in the few audits it has conducted of allocating  agencies, IRS has identified findings related to the QAPs, such as  missing preferences and selection criteria. For those audits, IRS  recommended that the QAP document—not auxiliary documents—  should be updated to address the identified deficiencies. Leveraging HUD  in the oversight process could help ensure that QAPs are reviewed  regularly and meet minimal federal requirements.
Finally, NCSHA states that GAO seems to confuse the financial feasibility  analysis with standards states may set for eligibility for the discretionary  basis boost. We acknowledge in our report that allocating agencies  conduct financial feasibility and other analyses to determine the  appropriate amount of LIHTCs to award and describe the different  methods we observed in the nine selected agencies. However, as noted  in the report, we observed a range of practices for awarding discretionary  basis boosts, including an automatic basis boost that is applicable to all  LIHTC projects and could lead to fewer projects being subsidized.  Further, because IRS does not regularly review QAPs that list criteria for  discretionary basis boosts, IRS is unable to determine the prevalence of  these types of policies among allocating agencies that could result in  oversubsidizing projects. Furthermore, continuance of such policies could  establish a precedent for other states to adopt. NCSHA wrote that nothing  in Section 42 directs IRS to provide guidance about discretionary basis  boosts. Although not explicit in Section 42, we maintain that federal  agencies and state allocating agencies—acting as stewards of federal  resources—have the responsibility to efficiently use such resources to the  best of their ability, particularly in what NCSHA has accurately noted as a  resource-constrained environment.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  Secretaries of Housing and Urban Development, and Treasury; the  Commissioner of Internal Revenue; the appropriate congressional  committees; and other interested parties. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report are listed in  appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report discusses how state and local allocating agencies administer  the Low-Income Housing Tax Credit (LIHTC) program and any oversight  issues the allocating agencies or the Internal Revenue Service (IRS) face  in implementing the program. More specifically, this report describes how  allocating agencies (1) award LIHTCs, (2) assess the reasonableness of  development costs and financial feasibility of LIHTC properties, and (3)  monitor LIHTC properties’ compliance with program requirements.
For all three objectives, we conducted a structured analysis of 2013  Qualified Allocation Plans (QAP) to gather information about the practices  of allocating agencies for awarding credits, assessing costs, and  monitoring. The QAPs we reviewed were from all 50 states, the District  of Columbia, Puerto Rico, American Samoa, Guam, the Northern Mariana  Islands, the U.S. Virgin Islands, and the cities of Chicago and New York  City, for a total of 58 QAPs. For our analysis, which primarily focused on  information in the QAPs themselves, we developed a Data Collection  Instrument (DCI). To help determine what questions to include, we  reviewed a small sample of plans to ascertain what types of information  were available in QAPs and interviewed housing groups, academics, the  National Council of State Housing Agencies (NCSHA), and officials from  IRS and the Department of Housing and Urban Development (HUD). The  DCI did not capture information from the agencies’ supplemental LIHTC  materials, such as applications, manuals, and other documents. However,  in an effort to present the most recent information available on certain  practices, we also reviewed 2015 QAPs and other LIHTC documents at  nine allocating agencies we visited (we discuss agency selection and the  site visits below). The results of the DCI analysis provide insights into  what information these plans include in relation to awarding credits,  assessing costs, and monitoring compliance.
In addition, we visited nine allocating agencies to observe the processes  used to award tax credits, assess the reasonableness of development  costs, and monitor compliance of properties. The nine agencies were in  California; Chicago, Illinois; Illinois; Massachusetts; Michigan; Nevada;  Rhode Island; Virginia; and Washington, D.C. We primarily considered  the following four factors to select this nonprobability nongeneralizable  sample:
2014 state population, which is used to determine the amount of  LIHTCs available to each state annually;  findings from HUD’s Office of the Inspector General and state auditors  on LIHTC-related audits;  selected information from our analysis of 2013 QAPs, such as types  of scoring criteria used, limits to total development costs, and  references to separate compliance monitoring guidelines; and  selected information from NCSHA’s 2012 Factbook, such as the  amount of credits requested and allocated in 2012 and whether the  allocating agency contracted out compliance monitoring activities.
We also considered variation in geographic location, information about  program administration in press releases or media articles, perspectives  from interviews with industry experts, and the presence of suballocating  agencies within a state. While the results of the site visits cannot be  generalized to all allocating agencies, they provided insight into the ways  in which agencies implemented various LIHTC requirements.
During our visits, we conducted a file review of a nongeneralizable set of  projects at each allocating agency to collect information about agency  practices as well as compliance with program requirements. We used a  random sample method to select files based on the full list of applicants  that were awarded tax credits in 2013, the full list of projects placed-in- service in 2013, and the full list of projects that were inspected in 2013  and any noncompliance issues found. We assessed the reliability of the  databases that contained the information at each allocating agency by  reviewing documentation (such as data dictionaries and database  manuals) and interviewing the relevant officials responsible for  administering and overseeing the databases. We determined the data  were reliable for the purpose of selecting files for our review. For the file  review, we also used a checklist to help ensure that we were capturing  consistent and pertinent information from each file. For example, in  developing the checklist, we reviewed Section 42 of the Internal Revenue  Code (Code) as well as Department of the Treasury (Treasury)  regulations to help ensure we could document relevant information that  evidenced agency compliance with federal requirements.
To describe how allocating agencies award LIHTCs, we reviewed the  Code, Treasury regulations, and guidance. During our site visits, we  interviewed agency officials for information on how the agencies develop  and apply selection criteria in reviewing applications and awarding tax  credits to developers. We also conducted file reviews at each of the  selected agencies—for a total of six approved applications (or all  approved applications, if less than six were selected in the 2013  allocation round)—to determine what information and documentation  developers submitted with their applications, and how allocating agencies  reviewed and scored the applications. Using the checklist, we reviewed  how agencies met Code requirements for market studies, extended use  agreements, and local government notifications. To identify any issues  the IRS faces in overseeing allocating agencies awarding LIHTCs, we  interviewed officials from IRS and Treasury to discuss agencies’ practices  and any guidance issued. We also reviewed federal internal control  standards to identify key activities that help ensure that compliance with  applicable laws and regulations is achieved. We also interviewed officials  from HUD’s Office of Fair Housing and Equal Opportunity to gain their  perspective on how allocating agencies, through their QAPs and practice  of awarding LIHTCs, can affect fair housing.
To describe how allocating agencies assess the reasonableness of  development costs and financial feasibility of LIHTC properties, we  reviewed the Code, Treasury regulations and guidance, and best  practices from NCSHA. We conducted interviews at the nine agencies to  obtain perspectives on how the agencies assess the reasonableness of  development costs and financial feasibility, including the types of cost  limits that were established, how required cost certifications were  documented, and how cost overruns were handled. We also conducted a  file review at each of the agencies for three approved applications from  2013 and three developments that were placed-in-service in that year to  determine how allocating agencies analyzed project feasibility and  viability. Using the checklist, we reviewed the agencies’ determinations of  credit amounts as well as how agencies met the Code requirement to  determine credit amounts at three points in time (at application, allocation,  and placed-in-service). To identify any issues the IRS faces in overseeing  allocating agencies assessing the reasonableness of costs, we  interviewed officials from IRS and Treasury about agencies’ practices for  assessing the reasonableness of development costs and financial  feasibility of LIHTC properties. We also reviewed federal internal control  standards to identify key activities that help program managers achieve  desired results through effective stewardship of public resources. We  also interviewed HUD officials from the Office of Fair Housing and Equal  Opportunity and from the Office of Multifamily Housing Programs to gain  perspectives on development cost limits and the use of basis boosts in  the LIHTC program.
To evaluate how allocating agencies monitor LIHTC properties’  compliance with program requirements, we reviewed the Code, Treasury  regulations, and IRS guidance that describe federal requirements for such  monitoring. We also reviewed IRS documentation on its roles and  responsibilities in overseeing allocating agencies and taxpayers. We  conducted interviews at the nine agencies to obtain perspectives on how  the agencies met Code requirements for physical inspections and file  reviews, communicated inspection findings to property owners, and  transmitted noncompliance findings to IRS using Form 8823. We  conducted a file review at each of the agencies for six developments that  were inspected in 2013 and reviewed any prior inspections and annual  certifications the developments had on file. Using the checklist, we  identified and reviewed the frequency of inspections, any noncompliance  findings, and how they were resolved, as detailed in the files. To identify  any issues the IRS faces in overseeing allocating agencies’ compliance  monitoring of LIHTC properties, we reviewed IRS’s processes for  identifying and conducting audits on taxpayers claiming LIHTCs and  conducted a site visit to the IRS Low-Income Housing Credit Compliance  Unit in Philadelphia, Pennsylvania, to observe how submitted forms were  processed. We interviewed officials from IRS and Treasury about  agencies’ practices for submitting Form 8823 and how IRS records  information in its Low-Income Housing Credit database. We also  reviewed federal internal control standards to identify key activities that  help ensure that compliance with applicable laws and regulations is  achieved. We interviewed HUD officials from the Real Estate  Assessment Center (REAC) to discuss the databases they manage and  their efforts to collect information on LIHTC properties, as well as officials  from the Office of Policy Development and Research about how HUD  uses the data it collects. Lastly, we interviewed HUD officials involved in  the Rental Policy Working Group to obtain updates on the interagency  effort to consolidate required physical inspections of subsidized rental  housing.
We conducted this performance audit from February 2014 to May 2016 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Internal Revenue Service
section_title: Appendix III: Comments from the Department of Housing and Urban Development
section_title: Appendix IV: Comments from the National Council of State Housing Agencies
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above Andy Finkel (Assistant  Director), Christine Ramos (Analyst-in-Charge), Jordan Anderson,  Jessica Artis, William R. Chatlos, Max Glikman, Anar Jessani, Elizabeth  Jimenez, Stuart Kaufmann, John McGrail, Marc Molino, Ruben Montes de  Oca, Anna Maria Ortiz, Nadine Garrick Raidbard, Barbara Roesmann,  and MaryLynn Sergent made major contributions to this report.