Low-Income Housing Tax Credit: Joint IRS-HUD Administration Could Help Address Weaknesses in Oversight
Published: 2015-07-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The 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 2014. LIHTC encourages private equity investment in low-income housing through tax credits. HFAs receive an annual allocation of tax credits and competitively award the credits to owners of qualified projects. GAO was asked to review the administration and oversight of the program. This report addresses, among other things, (1) IRS oversight of LIHTC and (2) how LIHTC administration and oversight compare with that of other tax credit programs. GAO reviewed regulations and guidance for monitoring HFAs and taxpayers; analyzed information on IRS audits of HFAs; reviewed selected programs that award tax credits similarly to LIHTC; and interviewed IRS, HUD, and HFA officials.
section_title: What GAO Found
paragraphs: Internal Revenue Service (IRS) oversight of the Low-Income Housing Tax Credit (LIHTC) program has been minimal. Specifically, since 1986 IRS conducted seven audits of 56 state housing finance agencies (HFA) on which IRS relies to administer and oversee the program. (HFAs are state-chartered authorities established to meet affordable housing needs.) Federal internal control standards call for monitoring to be performed continually in the course of normal operations and be ingrained in agency operations. Oversight of HFAs has been minimal, partly because LIHTC is viewed as a peripheral program in IRS in terms of its mission and priorities for resources and staffing. Without such reviews, IRS cannot determine the extent of noncompliance and other issues at HFAs.
IRS jointly administers other programs: the Historic Rehabilitation Tax Credit with the National Park Service and the New Markets Tax Credit with the Community Development Financial Institutions Fund in the Department of the Treasury. The federal agencies that work with IRS to oversee these programs have missions consistent with the purposes of these programs; they also conduct monitoring, report on performance, and collect data. For example, officials of both agencies told GAO that staff routinely conduct site visits and other project reviews. In these cases, IRS also is able to benefit from the other federal agencies' policy and subject-matter expertise. Likewise, the Department of Housing and Urban Development's (HUD) experience in administering affordable housing programs and working with HFAs may benefit IRS in its administration and oversight of the LIHTC program. More specifically, HUD relies on state and local housing agencies (including HFAs) to implement its programs and already has processes and procedures in place to oversee them. Although GAO and others have identified weakness in HUD's program evaluation and oversight activities, HUD has taken steps to address some of these issues and its existing processes and procedures constitute a framework on which further changes and improvement can be made. Moreover, IRS is not well positioned to oversee LIHTC. Since 1990, IRS has been on GAO's high-risk list due to significant capacity challenges and incomplete monitoring of tax law enforcement. IRS's budget has been reduced by 10 percent and enforcement program performance and staffing levels have declined since 2010.
Joint administration with HUD could better align program responsibilities with each agency's mission and more efficiently address existing oversight challenges. Under joint administration, IRS could retain responsibilities consistent with its mission (as it does in the other two tax credit programs). For example, IRS could continue to enforce taxpayer compliance. Assigning oversight responsibilities to HUD could involve additional resources for HUD. For LIHTC and the other two programs, GAO found that each used different mechanisms to fund administrative responsibilities. For instance, Historic Rehabilitation uses fees to fund its program, including oversight, while New Markets requests funding through annual appropriations. The level of resources that would be needed to perform an adequate level of oversight of HFAs is not known. An estimate of potential costs and funding options for financing enhanced federal oversight of the LIHTC program could benefit the agency involved and provide useful information to Congress.
section_title: What GAO Recommends
paragraphs: Congress should consider designating HUD as a joint administrator of the program. HUD's role should include oversight responsibilities (such as regular monitoring of HFAs) to help address deficiencies GAO identified. Treasury agreed HUD could be responsible for analyzing the effectiveness of LIHTC, with IRS continuing to enforce tax law. HUD and IRS did not comment on the matter for congressional consideration. HUD supported consideration of a structure for enhanced interagency coordination. The association representing HFAs disagreed with the matter. GAO maintains that joint administration would strengthen program oversight.

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 2014. The program encourages private-equity  investment in low-income housing through tax credits and is administered  by one federal agency and state agencies—the Internal Revenue Service  (IRS) and state housing finance agencies (HFA). HFAs are state- chartered authorities established to meet the affordable housing needs of  the residents of their states and administer a wide range of affordable  housing and community development programs. Each state receives an  annual allocation of LIHTCs, determined by statutory formula according to  population. HFAs 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. Developers typically attempt to obtain funding for  their projects by attracting third-party investors that are willing to  contribute equity to the projects; the project investors then can claim the  tax credits.
We and others have observed that severe resource constraints could  affect the ability of IRS to administer its programs. In a February 2015  report, we found that IRS staffing reductions and other budget issues  affected the number of tax return examinations conducted. For example,  IRS’s appropriations declined below fiscal year 2009 levels, affecting staff  levels (a reduction of 9 percent since 2009) and examinations.
You asked us to review how the LIHTC program is administered and  identify any oversight issues. This report (1) discusses how the LIHTC  program is administered; (2) evaluates processes for overseeing the  LIHTC program; and (3) compares the administration of other tax credit  programs with LIHTC.
To determine how the LIHTC program is administered, we reviewed IRS  regulations and guidance; documentation on the role of HFAs, investors,  and syndicators in the LIHTC program; and specific monitoring  requirements of other federal programs that also may be funding sources  for projects with LIHTCs, such as the Home Investment Partnerships  (HOME) program and the project-based Section 8 rental assistance  program. We interviewed the National Council of State Housing  Agencies (NCSHA) and reviewed relevant documents for information to  illustrate the number of LIHTC units that contain other federal funding. We  chose this group because it represents HFAs and advocates for  affordable housing. We also interviewed officials from IRS, Department of  the Treasury (Treasury), Department of Housing and Urban Development  (HUD), and two HFAs on program administration.
To evaluate processes for overseeing the LIHTC program, we reviewed  IRS policies and guidance including how HFAs and taxpayers are  selected for review. We reviewed federal internal control standards to  identify key activities that help ensure that the program is addressing  requirements and that appropriate actions are taken to address program  risks. We also reviewed strategic and annual reports of IRS, Treasury,  and HUD to identify any program goals and performance measures on  the LIHTC program. We analyzed information contained in IRS’s Low- Income Housing Credit database from December 2005 to August 2014.  We assessed the reliability of the database and determined that data  reliability issues impeded our analysis, as discussed further in this report.  Therefore, we limited our discussion to the type of information collected,  the extent to which the information was collected, and potential analysis  that could be conducted if the data were more complete and accurate.  We also interviewed officials and reviewed documents at IRS, Treasury,  HUD, and two HFAs on IRS processes for overseeing the program.
To compare the administration of other tax credit programs with the  LIHTC program, we reviewed other tax credit programs administered by  IRS to identify those most similar in purpose and structure to LIHTC. We  focused on the Historic Rehabilitation Tax Credit and New Markets Tax  Credit programs because both are aimed at encouraging community  development and are jointly administered by IRS and another federal  agency—the Department of Interior’s National Park Service (NPS) and  Treasury’s Community Development Financial Institutions (CDFI) Fund,  respectively. We reviewed prior GAO reports about each program. In  addition, we reviewed HUD’s role in affordable housing, including its work  with HFAs. We interviewed officials at the Departments of Interior and  Treasury, and at the CDFI Fund on the administration of the Historic  Rehabilitation Tax Credit and New Markets Tax Credit programs.  Appendix I contains additional details about our scope and methodology.
We conducted this performance audit from February 2014 through July  2015 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: The LIHTC program replaced older tax incentives, such as accelerated  depreciation—that allowed taxpayers to deduct the costs of assets faster  than their value actually declined—with a federal-state program in which  HFAs receive LIHTC allocations of credits and award the credits to  specific projects that meet requirements of Section 42 of the Internal  Revenue Code (code). Prior to the establishment of LIHTC, federal  housing assistance generally involved subsides or grants administered by  HUD to construct new affordable housing and to make rents affordable in  existing rental housing.
An LIHTC project owner can develop new housing or acquire and  rehabilitate existing housing. The projects can be apartments, single- family housing, single-room occupancy, or permanent and transitional  housing for the homeless. The project may include units for low-income  households and market-rate units. The amount of credit received is based  on the number of low-income units.
The project owners—the taxpayers receiving LIHTCs—agree to set aside  a certain percentage of the units with rents that are affordable to  qualifying low-income households for at least 30 years. A project must  reserve at least 20 percent of the available units for households earning  up to 50 percent of the area’s median gross income (adjusted for family  size), or at least 40 percent of the units for households earning up to 60  percent of the area’s median gross income (adjusted for family size).  HUD and Treasury officials noted that in practice, LIHTC projects usually  exceed these minimum affordability requirements by setting aside nearly  all of their units for low-income households.
In return, taxpayers 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 taxpayer chooses, the succeeding taxable  year. IRS can recapture (take back) some or all of the credits received  by taxpayers if the taxpayers have not met the requirements during the  compliance period. In addition, properties awarded credits after 1989  must comply with the affordability requirements for at least another 15  years (the extended use period) but are no longer subject to recapture  after the compliance period. HFAs may impose longer affordability  restrictions on properties than the minimum 30-year period. The three  time periods begin on the same day—the first day of the tax year in which  the building is placed in service, or if taxpayers elect, the beginning of the  following tax year. The allowable credit may be reduced (in part or in  whole) for the tax year if taxpayers were not compliant with the code  requirements. Taxpayers also may be subject to the recapture of credits  claimed in prior years.
LIHTC is administered by IRS and state HFAs. To promote compliance  with LIHTC program requirements, IRS is the federal entity responsible  for (1) enforcing taxpayer compliance and (2) overseeing HFAs’  implementation of the program. All 50 states, the District of Columbia,  Puerto Rico, American Samoa, Guam, the Northern Mariana Islands, and  the U.S. Virgin Islands have HFAs that receive LIHTC allocations.
HUD’s role includes mandatory and voluntary data collection on the  LIHTC program. More specifically, the agency has collected information  on tenant characteristics, as mandated by the Housing and Economic  Recovery Act of 2008. In addition, since 1996, HUD has voluntarily  collected LIHTC project-level data because of the importance of these  credits as a source of funding for low-income housing. HUD also has a  role in designating difficult development areas and qualified census  tracts. Figure 1 provides an overview of the LIHTC process and  participants.
HFAs competitively award credits. HFAs competitively award tax  credits to developers or owners of qualified projects that reserve all or a  portion of their units for low-income tenants. HFAs award the credits in  accordance with qualified allocation plans (QAP) that outline states’  affordable housing priorities and ranking and selection procedures for  projects.
Developers apply to HFAs for tax credits. To apply for tax credits, a  developer must submit a detailed proposal to an HFA. To qualify for  consideration, a project must meet certain requirements, such as  reserving specified percentages of available units for lower-income  households and restricting rents for these households to 30 percent of a  calculated income limit.
Investors provide equity and receive tax benefits. Developers typically  attempt to obtain funding for their projects by attracting third-party  investors willing to contribute equity financing (up-front cash) to projects.  The developer sells an ownership interest in the project to one or more  investors, or in some instances, to a syndicator acting as a broker  between the developer and investor(s). Tax credit investors can be  individuals, but the vast majority of investments have come from  corporations, either investing directly or through private partnerships.  Although investors buy an interest in an LIHTC partnership, this process  is commonly referred to as buying tax credits because the investors  receive tax credits in return for their investment (providing that the  building is developed and operated according to code requirements).
Syndicators pool projects, recruit investors, and provide services.  Syndicators, when involved, are intermediaries that often administer tax  credit deals and charge a fee for overseeing the investment transaction.  Syndicators pool several projects into one tax-credit equity fund and  recruit investors willing to become partners in LIHTC partnerships. The  investor, as a limited partner, has a large ownership percentage in the  property but otherwise is not directly involved in project development.  Syndicators provide legal and accounting services required to pool the tax  credits, monitor projects for the investors, and sometimes fund reserves  for legal and administrative costs.
subsections: 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 (see fig. 2).
The Small Business/Self-Employed Division (SB/SE) primarily  administers the LIHTC program. One full-time program analyst  develops internal protocols, provides technical assistance to HFAs,  and provides community outreach to industry groups and taxpayers  (developers/owners and investors).
In related activities, one staff member in the Low-Income Housing  Credit compliance unit (compliance unit) assists in determining if tax  returns may warrant an audit. An additional 5.6 full-time equivalents,  also from the compliance unit, assist in reconciling LIHTC forms from  HFAs and taxpayers to identify potential inconsistencies and populate  IRS’s Low-Income Housing Credit database. The database has been  used to record information from certain IRS forms submitted by HFAs  and taxpayers.
The Office of Chief Counsel, within the Commissioner’s office,  provides technical assistance for the LIHTC program and determines  the amount of credit available for the national pool—the amount of  unused housing credit carryovers allocated to qualified states for a  calendar year from a pool of unused credit. According to IRS officials,  six attorneys work part-time on the LIHTC program.
section_title: IRS Responsible for Oversight of HFAs and Taxpayers, and HFAs Make Award Decisions and Monitor Projects
paragraphs: IRS administers the LIHTC program by developing regulations and  guidance and is responsible for overseeing HFAs and taxpayer  compliance. HFAs award tax credits to qualified projects, determine the  credit amounts needed for financial feasibility of the projects, and monitor  project compliance. The design of the LIHTC program can result in other  entities—private and public—providing additional types of monitoring of  LIHTC projects; examples include investors and syndicators performing  due diligence in relation to a project’s viability and eligibility for tax credits.
subsections: section_title: IRS Regulatory and Oversight Responsibilities for LIHTC
paragraphs: IRS administration of the LIHTC program involves developing and  publishing regulations and guidance as well as overseeing compliance on  the part of HFAs and taxpayers. The IRS Office of Chief Counsel, with  assistance from Treasury’s Office of Tax Policy, develops and publishes  regulations and guidance based on requirements in the code. Published  guidance may include revenue rulings and procedures, notices, and  announcements. Other guidance for the program includes an Audit  Technique Guide for Completing Form 8823—the report on  noncompliance or building disposition, on which HFAs record findings  after inspecting projects—and an Audit Technique Guide for Low-Income  Housing Credit. The guide for completing form 8823 includes specific  instructions for HFAs on when desk audits, site visits, and file reviews are  to be performed; how to complete the form; and guidelines for  determining noncompliance in areas such as health and safety standards,  rent ceilings, income limits, and tenant qualifications. The purpose of the  guide is to provide standardized operational definitions of noncompliance  categories. The Low-Income Housing Credit guide is a manual developed  to assist IRS examiners who conduct audits of taxpayers receiving  LIHTCs. The guide discusses topics ranging from examination techniques  to specific issues pertinent to the LIHTC program.
IRS oversight covers allocation of LIHTCs by HFAs and taxpayer  compliance (see fig. 3). One full-time analyst monitors the program with  assistance from the compliance unit. The compliance unit staff review  information on three IRS forms that are the basis of LIHTC program  reporting for HFAs and taxpayers. IRS is responsible for reviewing the  forms and using them to determine whether program requirements have  been met. Specifically, IRS compliance unit staff and the program analyst  review the following:
Compliance unit staff review information on credit allocation and  certification (form 8609). The two-part form is completed by the HFA  and the taxpayer. HFAs report the allocated amount of tax credits  available over a 10-year period for each building in a project. The  taxpayer reports the date on which the building was placed in service.  IRS staff use a checklist to record information that might warrant  additional review by the program analyst, such as discrepancies in the  number of tax credits the HFA and the taxpayer reported. They also  enter the information from this form in IRS’s Low-Income Housing  Credit database.
The compliance unit uses a checklist to review noncompliance or  building disposition (form 8823). HFAs must complete the form after  conducting an on-site physical inspection of an LIHTC project if any  noncompliance is found. All projects must be inspected by HFAs at  least every 3 years (including at least 20 percent of low-income units).  The form records any findings (and corrections of previous findings)  based on the inspection of units and review of the low-income  certifications. According to IRS’s guide for completing form 8823,  when findings are identified by HFAs and reported to IRS, the  compliance unit must notify the owner of the noncompliance issues. In  addition, the compliance unit determines if the identified  noncompliance may warrant consideration of a taxpayer audit by IRS.  If so, the compliance unit will forward an audit consideration package  for the program analyst’s review. The program analyst then  determines the audit potential of the taxpayer. If an audit were  needed, the program analyst would forward the audit package to the  relevant IRS audit examination division—such as SB/SE—and  monitor the status of the audit.
The compliance unit staff review the allocations each HFA reports as  having been made on the HFA annual report (form 8610) to ensure  allocations do not exceed a statutorily prescribed ceiling for that year.  IRS officials stated that the Office of Chief Counsel reviews all the  8610s and reports the state housing credit ceiling in published  guidance for the upcoming year. HFAs also use the form to report  whether they have met certain program requirements, such as  confirming that their QAPs contain monitoring procedures and  affirming the completion of LIHTC project monitoring. HFAs generally  complete the form by the end of February of each year. The program  analyst then reviews the information and follows up with HFAs as  necessary.
section_title: HFAs Are Responsible for Awarding Tax Credits and Monitoring LIHTC Projects
paragraphs: IRS relies on HFAs to administer and oversee the LIHTC program in their  states. In addition to awarding tax credits to qualified projects, HFAs are  responsible for: determining the amount of credit needed for the financial feasibility of  each project and its viability as a qualified low-income housing project  through the 10-year credit period. HFAs make determinations (1)  when the application is received, (2) when the allocation of the credit  is completed, and (3) when the building is placed in service and the  taxpayer submits a final cost certification. monitoring LIHTC properties for compliance with program  requirements (for example, health and safety standards, rent ceilings,  income limits, and tenant qualifications). Findings from HFA  monitoring are provided to IRS on noncompliance or building  disposition (form 8823). Taxpayer noncompliance with LIHTC  requirements may result in IRS denying claims for the credit in the  current year or recapturing—taking back—credits claimed in prior  years.
Once IRS monitoring of LIHTC projects ends after year 15, HFAs have  sole authority to monitor compliance for at least another 15 years, and the  taxpayer must ensure that the project continues to meet program  requirements, as defined in the project’s extended use agreement with  the HFA. If a project were found to be noncompliant, the HFA could take  action, such as litigation under state law.
section_title: LIHTC Projects Also May Be Monitored by Other Entities
paragraphs: The design of the LIHTC program (for instance, the roles of investors and  syndicators) can result in other entities—private and public—providing  additional types of monitoring of LIHTC projects. Investors and  syndicators not only provide financing for LIHTC projects, but also provide  project oversight to help ensure that they receive the expected tax credits  over the designated period. For instance, an LIHTC investor needs to  make sure the property is suitable for occupancy and rented to qualified  low-income families at restricted rents during the initial 15-year period. To  mitigate risk before investing, the investor and syndicators will underwrite  and screen properties for quality and sustainability. For example, the  investor may ensure the development team has adequate resources to  build and operate the property and that mechanisms are in place to avoid  foreclosure. Additionally, because of the amount of capital that can be  involved in projects, investors may require additional testing and auditing  beyond what is required by the program. Investors and syndicators also  may maintain a list of properties to more closely monitor based on  identified performance measures. However, findings from investors and  syndicators typically are not shared with the public or federal agencies,  according to Treasury officials.
LIHTC projects also can receive funds from other federal programs and  be subject to monitoring requirements of those programs—for example,  HUD’s HOME and project-based Section 8 rental assistance programs.  According to a 2012 industry survey of HFAs with LIHTC projects that  received other federal funds, an average of about 20 percent of the units  received HOME funds and an average of about 18 percent received  project-based Section 8 rental assistance. The monitoring conducted for  the other programs provides additional information that could be useful for  IRS in monitoring LIHTC projects. However, IRS officials stated they do  not review findings on HFAs that other programs identified but rather  focus on ensuring completion and submission of IRS tax forms. Examples  of monitoring requirements from these programs include the following:
For HOME, HUD requires that participating jurisdictions conduct on- site physical inspections of projects every 1, 2, or 3 years, depending  on the size of the project. These site visits also require reviews of  program and project files. HUD approves the use of grant funds by  reviewing a state or locality’s consolidated plan, which identifies  needs, sets priorities, determines resources, and sets goals.
For project-based Section 8 rental assistance, performance-based  contract administrators (entities such as HFAs and public housing  authorities) assist HUD in overseeing individual Section 8 properties  and ensure that properties are in compliance with HUD policies. The  contract administrators must perform annual management and  occupancy reviews for all their assigned properties and conduct  monthly reviews of all payment vouchers submitted by property  owners. For example, the contract administrators conduct on-site  reviews of property owners’ tenant information files and ensure  property owners provide complete and accurate tenant data to HUD.  HUD’s oversight of the contract administrators can include reviews of  status reports of performance-based administrators and annual  compliance reviews, which determine the compensation of the  contract administrator.
In addition to specific program requirements, HUD program participants  must comply with several federal civil rights requirements, including the  Fair Housing Act and Americans with Disabilities Act. Such  requirements prohibit discrimination in the administration of housing  subsidies and require buildings to be designed and constructed in an  accessible manner, located in appropriate sites and neighborhoods, and  marketed equally to all potential tenants. For certain requirements,  officials told us that HUD routinely monitors program participants. For  others, HUD uses an administrative complaint procedure to identify  candidates for reviews. HUD’s monitoring consists of a combination of file  reviews and site visits.
HFAs also have used funding from the Tax Credit Assistance Program  (TCAP), administered by HUD, and the Grants to States for Low-Income  Housing Projects in Lieu of Low-Income Housing Credits (Section 1602)  program, administered by Treasury. The LIHTC program was severely  disrupted in 2008–2009 (in the midst of the financial crisis), when the  demand for the credits and the price investors were willing to pay for them  declined. TCAP and Section 1602 provided gap financing to fill the equity  gap that resulted from lower LIHTC prices, allowing stalled “shovel-ready”  projects to proceed. The two programs no longer actively fund new  projects, but as of May 2015, compliance monitoring of funded projects  remained ongoing.
The TCAP and 1602 programs require more compliance monitoring than  traditional LIHTC projects; for example, of asset-management functions  the HFAs perform. HUD and Treasury also have used a risk-based  approach to monitor TCAP and 1602 projects. For example, HUD  determined that TCAP projects that had less than $10,000 in LIHTC  investment and no other federal funding sources might be at higher risk of  noncompliance. HUD officials explained these TCAP projects were  considered higher-risk due to the potential of less oversight from other  private and public entities. Treasury reviewed HFAs for compliance in the  first year of the Section 1602 program. Then Treasury used a risk-based  approach to identify HFAs for subsequent reviews (they would merit  additional monitoring if noncompliance issues were identified in the first  review). Thereafter, on an annual basis during the compliance period,  HFAs have to certify to Treasury that they performed all required  compliance monitoring activities and report to Treasury the results of  these activities for each project.
Finally, unlike LIHTC, some of these grant programs—HOME, project- based Section 8 rental assistance, and TCAP—are considered federal  financial assistance by the Single Audit Act, and thus are subject to an  annual single audit by a third party. Annual external audits must include  a review of financial statements and internal controls and adherence to  program compliance requirements.
section_title: IRS Oversight to Identify and Address Compliance Issues Has Been Minimal
paragraphs: IRS performed minimal oversight of HFAs, particularly in relation to  reviewing QAPs and assessing HFA compliance. IRS conducted some  audits of taxpayers claiming the tax credits, but does not have detailed  information on the results of these audits. Moreover, IRS has not set  goals or assessed performance for the program. Finally, data in IRS’s  Low-Income Housing Credit database were not complete and reliable for  assessing compliance.
subsections: section_title: IRS Oversight of HFAs Has Been Minimal
paragraphs: IRS oversight of HFAs has been minimal, particularly in terms of  reviewing QAPs and conducting on-site or desk audits of HFAs. Federal  internal control standards state that internal control helps program  managers achieve desired results. Monitoring, one of the internal control  standards, should occur in the course of normal operations, be performed  continually, and be ingrained in the agency’s operations.
IRS officials stated they did not regularly review QAPs as part of their  compliance monitoring of the HFA annual report (form 8610). IRS’s  review of HFAs included a review of responses on the annual report  related to compliance monitoring procedures in the QAP and frequency of  monitoring conducted by the HFA. However, in addition to these  requirements, the code includes requirements for selecting projects and  ensuring a QAP is approved by the state governing agency. Yet, IRS  has not conducted regular reviews of QAPs to determine how HFAs  interpreted the code to select projects, if the QAPs included the required  compliance monitoring, or if the QAPs had been approved. As a result of  minimal monitoring, IRS does not know the extent of compliance  monitoring by HFAs, which limits its ability to determine if the HFAs  appropriately awarded credits to projects.
Moreover, IRS and Treasury were unclear about how to handle instances  in which a QAP did not meet requirements in the code. Some Treasury  and IRS officials stated that Treasury would have to invalidate all credits  allocated to an HFA if the QAP did not meet requirements, which could  affect awarded projects across multiple years. In contrast, IRS has  reported in audit-related documents that an HFA’s authority to allocate tax  credits should be revoked only when IRS determined that the HFA’s  noncompliance was widespread and willful. The documents suggest that  such revocation most likely would be applied prospectively to limit the tax  consequences for taxpayers.
IRS has performed few on-site or desk audits of the 56 HFAs—it audited  a total of 7 HFAs—from the program’s inception in 1986 through May  2015. According to an IRS summary report of all HFA audits conducted  from 2003 to 2014, the agency generally selected which HFAs to audit  based on press accounts and HFA self-reporting about lack of adherence  with compliance requirements. IRS officials also stated that HFAs  increasingly have missed the February 28 deadline to submit the annual  report (form 8610) and often submit incomplete or inaccurate forms. The  summary report recognized that conducting ongoing audits is a necessary  component of LIHTC program administration. The report also notes  continued audit presence would reinforce the importance of HFA  compliance with requirements in the code and provide an opportunity for  IRS to address deliberate noncompliance by HFAs.
The scope and methods of the reviews varied based on the types of  noncompliance the IRS program analyst identified. For instance, on one  audit the program analyst selected a sample of files on which to conduct  an in-depth review of HFA compliance activities. In another, the program  analyst enlisted the assistance of a field agent to review the HFA’s  internal controls for record keeping and credit allocation, among other  areas. The other audits were desk audits. Examples of the audit findings  include the following:
Written HFA policies conflicted with the requirements in the code or  Treasury regulations.
The QAP did not address all compliance requirements in the  regulations or was outdated.
Annual report to IRS had errors, such as incorrect credit allocations  and overstated numbers of inspections and reviews.
The HFA failed to submit form 8823 as required to report LIHTC  noncompliance.
Physical inspections and tenant file reviews were not completed as  required and notifications to owners were not conducted as required.
All but one audit was closed at the time of our review.
IRS cited multiple reasons for not conducting regular reviews of QAPs  and audits of HFAs. First, IRS officials stated that they did not regard a  regular review of QAPs as a part of their compliance responsibilities.  Second, IRS officials stated that because of other priorities the agency  does not have a sufficient number of LIHTC staff or other assigned  resources to conduct more audits of HFAs. IRS has statutory authority to  collect up to a $100 annual penalty from each HFA failing to file a timely,  accurate annual report. However, IRS officials said the agency concluded  that penalty collection would not be cost-effective because more  resources would be needed to collect the penalty than would be gained  through collection and that increasing the penalty amount would require  statutory change. Third, IRS officials stated that they had considered  involving IRS field office staff to conduct more HFA audits over the years,  but due to competing demands at IRS, this did not occur. The lack of  QAP reviews and audits of HFAs means that IRS is unable to determine  the extent to which HFAs meet requirements for awarding tax credits and  monitoring project compliance.
section_title: IRS Has Conducted Some Audits of Taxpayers Claiming LIHTCs but Does Not Have Detailed Information on Results of These Audits
paragraphs: IRS has conducted some audits of taxpayers claiming LIHTCs, but does  not have detailed information on these audits. In a 1997 report, we found  that IRS did not have an estimate of taxpayer compliance for the LIHTC  program and recommended that IRS explore alternative ways to evaluate  compliance with the requirements of the code by taxpayers. In 2000,  IRS had completed a review of a sample of 402 audits of LIHTC  taxpayers performed from 1995 through 1999 (an average of about 100  audits annually to determine a compliance level by taxpayers claiming the  credit and types of noncompliance). According to IRS, the review did not  find evidence of widespread noncompliance with the code. Officials also  stated the agency had not updated this review since 2000—15 years  ago—because IRS had been proceeding with the understanding that  nothing had changed with the compliance level.
According to IRS, the agency completed 555 additional audits (an  average of about 40 audits annually) of taxpayers claiming LIHTCs from  2001 through 2013. About 29 percent of these audits resulted in no  change to the amount of credit claimed by the taxpayer or recapture of  the credit. For the remaining audits, the taxpayer agreed to make  changes to the credit claimed (about 24 percent); IRS no longer pursued  the case (about 23 percent)—for example, because the statute of  limitation was within 1 year of expiring; IRS continued to audit the  taxpayer (about 10 percent); or IRS closed the case because the  taxpayer disagreed with the audit results and requested adjudication  (about 10 percent). According to IRS officials, competing audit priorities  have limited the number of LIHTC taxpayer audits conducted.
Detailed information on the results of the audits of taxpayers claiming  LIHTCs have not been shared with LIHTC staff. More specifically, IRS  examiners have not provided information on types and trends in  noncompliance or the amount of credit changed or recaptured. In June  2002, we concluded that tracking audit findings and identifying commonly  occurring issues could be valuable in helping management evaluate  agency oversight, monitor activities, and identify problem areas.  Moreover, we have consistently stressed the importance of IRS  conducting tax compliance research to understand the extent and causes  of taxpayer noncompliance and use the results to review audit  examination programs. LIHTC staff stated they have not maintained a  database on outcomes of audits (such as types of and trends in  noncompliance), the recapture of tax credits or adjustments of credit for  compliance monitoring purposes, or coordinated within IRS to monitor  recapture of the program credit. As a result, information on commonly  occurring issues and reasons for taxpayer noncompliance related to the  LIHTC program is not available to inform the program analyst responsible  for overseeing the program.
section_title: IRS Has Not Set Goals for LIHTC and Does Not Assess Performance
paragraphs: Although IRS is the only federal agency responsible for overseeing LIHTC  program compliance, it does not set goals or assess performance for the  program. Federal internal control standards state activities need to be  established to monitor performance measures and indicators, which  includes comparing data so that analyses can be conducted, as  appropriate. We previously reported that data availability was a  challenge in assessing tax expenditure performance. IRS collects  limited data that it needs to administer and enforce the code. It does not  use the information it collects to assess the housing production program,  such as the number and location of LIHTC projects. (We discuss IRS’s  Low-Income Housing Credit database in more detail later in this report.)
HUD’s role in the LIHTC program is generally limited to the collection of  information on tenant characteristics (mandated by the Housing and  Economic Recovery Act of 2008). However, it has voluntarily collected  project-level information on the program since 1996 because of the  importance of LIHTC as a source of funding for affordable housing. HUD  also has sponsored studies of the LIHTC program that use these data.  HUD’s LIHTC databases, the largest federal source of information on the  LIHTC program, aggregate project-level data voluntarily submitted by  HFAs and the tenant characteristic information HUD must collect. In our  December 2012 report on the LIHTC program, we found that HUD’s  LIHTC databases were incomplete and missing data on many projects.  We recommended HUD evaluate and implement additional steps to  improve the database, which could improve the federal government’s  ability to evaluate basic LIHTC program outcomes. HUD agreed and has  since implemented our recommendation by taking steps to identify  potential gaps in its database. For example, in December 2014, HUD  published a report analyzing data it must collect on tenants residing in  LIHTC properties. As part of this report, HUD compared property  information in its tenant database to the information in its property  database to help assess the completeness of both databases.
Furthermore, HUD has been limited in its ability to report complete  information on how the LIHTC program contributed toward meeting  agency priority goals and broader, federal housing goals. The Office of  Management and Budget’s 2014 guidance on content for strategic plans,  annual performance plans, and annual performance reports directs  agencies to include tax expenditures in their identification of organizations  and programs that contribute to agency priority goals (areas of special  focus as determined by the agency administration). HUD has strategic  goals to meet the need for quality affordable rental homes and build  strong resilient and inclusive communities. HUD also has a priority goal to  preserve and expand affordable rental housing. HUD’s fiscal year 2013  annual performance report and 2015 annual performance plan included a  performance measure that accounted for LIHTC projects with HUD- insured mortgages in its agency priority goal. Overall, HUD’s goals call for  continuing to assist about 5.5 million households living in subsidized  housing and serving approximately 62,000 additional households through  affordable rental housing programs. However, officials said data used to  support these goals do not include all LIHTC units, but only those units  that have HUD mortgage insurance. HUD has a separate process for  collecting LIHTC information for HUD-insured properties and does not  rely on any of the existing databases on LIHTC.
In our May 2011 glossary on performance measurement and evaluation,  we stated that performance measurement can serve as an early warning  system to program management because of its ongoing nature and as a  vehicle for improving performance and accountability to the public.  Information about the extent to which an intended purpose has been met  also can contribute towards broader evaluations of how well a program  has been working and actions that could be taken to improve results.  Basic information on results, such as the number and location of LIHTC  projects, is limited. Without goals and performance measures, decision  makers do not have sufficient information to assess the results or the  effectiveness of the program as a tool to maintain affordable housing.
section_title: IRS Data Were Not Reliable to Assess Compliance and Taxpayer Protections Prevent HUD from Using IRS Data
paragraphs: IRS had not comprehensively captured information reported for the  program in its Low-Income Housing Credit database and the existing data  were not complete and reliable. IRS guidance requires the collection of  data on the LIHTC program in an IRS database. The IRS database  records information submitted by HFAs and taxpayers on three forms— credit allocation and certification (form 8609), HFA report of  noncompliance or building disposition (form 8823), and HFA annual  reports (form 8610)—and IRS mainly uses the data to reconcile program  information submitted and identify taxpayers for audit.
subsections: section_title: Data on Credit Allocation and Certification Not Reliable
paragraphs: Based on our analysis of the information in the database, the data on  credit allocation and certification information were not sufficiently reliable  to determine if basic requirements for the LIHTC program were being  achieved. Federal internal control standards state that effective  information technology management is critical to achieving useful,  reliable, and continuous recording and communication of information.  However, our electronic testing of IRS data found instances in which  allocation dates and placed-in-service dates were incorrectly entered in  the database, which highlighted problems with how the data elements  were entered into the database from paper forms. Automatic edit checks  to ensure that the date fields entered are reasonable were not fully  implemented, although IRS’s database user guide describes the use of  such checks. Officials stated they did not become aware that the edit  checks were not working until our assessment of the data. The  programming of the edit checks contained errors, which prevented them  from working correctly. IRS officials agreed that these problems should be  corrected and data quality reviews conducted on an ongoing basis.  Because IRS has not regularly assessed the credit allocation and  certification information (form 8609) for errors and conducted  management review of the data, we could not determine how often LIHTC  projects were placed in service within required time frames. Without  improvements to the data quality of credit allocation and certification  information, it is difficult to determine if credit allocation and placed-in- service requirements have been met by HFAs and taxpayers,  respectively.
Moreover, we found IRS guidance requires information from the HFA  report of noncompliance or building disposition (form 8823) and the HFA  annual reports (form 8610) to be captured in the Low-Income Housing  Credit database. However, based on our review of the database, the  information was partially captured for the noncompliance form and not  captured for the HFA annual reports.
More specifically, we could not determine the types or frequency of  project noncompliance from data available on the HFA reports on  noncompliance or building disposition (form 8823). According to IRS,  the agency has received approximately 168,000 noncompliance or  building disposition forms since 2009 but the database included about  3,100 records (about 2 percent of records received). Officials told us  the decision was made in 2008–2009 to input information only from  forms that indicated a change in building disposition, such as the  foreclosure of a project. IRS focused on forms indicating a change  because of the serious nature of these occurrences for the program,  the impacts on taxpayers’ ability to receive credit, and greater  prevalence of these occurrences as a result of the economic  downturn. Additionally, when IRS upgraded its database in 2008 a  large backlog of un-entered information existed (the database was  offline from 2005 to 2008); however, officials realized their operations  were not affected by the lack of information. Officials further explained  it was not cost-effective to input information received from all forms  8823 into the database because the need for trend analysis on all  types of noncompliance was not useful for purposes of ensuring  compliance with the tax code. However, officials stated they have not  performed any cost estimates to determine the cost of inputting such  information.
The database does not contain information from HFA annual reports  (form 8610). IRS officials stated there were plans to include this  information in the database from 2009 to the present, but due to  competing priorities for limited resources, it has not yet been added.
section_title: Restrictions on Information Sharing
paragraphs: Statutory restrictions in the Internal Revenue Code prevent the disclosure  of taxpayer information to other federal agencies, such as HUD, that may  make more use of the data. For LIHTC, taxpayer protections restricting  disclosure of taxpayer information generally prohibit IRS from sharing  data it collects on the LIHTC program with HUD. HUD officials said they  experienced difficulties obtaining data from IRS to help ensure the  completeness of their data because of issues related to protections for  taxpayer information. The code does not specifically give IRS the  authority to provide information to HUD so that HUD can assess the  completeness of the data it receives from HFAs on tenant characteristics  or other data elements in HUD’s LIHTC database for the program.
Nevertheless, Congress has granted some statutory exceptions to the  provisions relating to confidentiality while balancing the expectation of  taxpayer privacy with the policy goals of efficient use of federal resources,  public health and welfare, and law enforcement. IRS staff suggested  internally that Congress create such an exception for the LIHTC program,  authorizing IRS to provide HUD with protected information on LIHTC  buildings and enabling HUD to assess the completeness of the LIHTC  tenant information it collects. In that case, HUD could then review its  databases, compare the information against the IRS data, determine what  information it was missing on tenant characteristics, and follow up with  the HFA as necessary. According to officials, neither IRS management  nor Treasury (which must present all administration proposed tax  legislation) has yet received this internal proposal.
section_title: LIHTC Administration Differs from Some Other Tax Credit Programs
paragraphs: LIHTC administration differs from some other tax credit programs that are  jointly administered by IRS with another federal agency. The other federal  agencies conduct monitoring, report on performance, collect data, and  have missions consistent with the purposes of the programs. HUD’s  experience in affordable housing and working with HFAs may benefit the  LIHTC program. More specifically, HUD’s rental housing programs rely on  state and local housing agencies (including HFAs) to implement  programs. A greater involvement of HUD in the LIHTC program may help  alleviate the oversight challenges cited in this report. But joint federal  administration may require additional resources for HUD.
subsections: section_title: IRS Jointly Administers Some Tax Credit Programs with Other Federal Agencies
paragraphs: In some cases, IRS jointly administers tax credit programs with other  federal agencies that provide key oversight and administrative support,  such as monitoring, performance measurement, and data collection.  Specifically, we identified two programs—the Historic Rehabilitation Tax  Credit and the New Markets Tax Credit—in which federal administration  of the programs is shared between IRS and another agency (see table 1  for overview).
We discuss the Historic Rehabilitation Tax Credit and the New Markets  Tax Credit programs in greater detail below, focusing on differences with  how IRS oversees LIHTC—such as describing how the other federal  entities monitor and assess program performance.
Historic Rehabilitation Tax Credit Program  The Historic Rehabilitation Tax Credit  program promotes the rehabilitation of historic  properties. For this credit, developers  planning to rehabilitate “certified historic  structures”—buildings listed in the National  Register of Historic Places or located in a  registered historic district and certified by the  National Park Service (NPS) as contributing to  the historic significance of that district—can  apply for certification to NPS through their  local State Historic Preservation Officer for tax  credits in the amount of 20 percent of the  certified rehabilitation costs.
Historic Rehabilitation Tax Credit. The National Park Service’s  Technical Preservation Services (TPS) administers the Historic  Rehabilitation Tax Credit program, which cost an estimated $580 million  in forgone revenue in fiscal year 2014. TPS promulgates the Secretary of  the Interior’s Standards for Rehabilitation (standards), to which renovation  projects must conform to be eligible for rehabilitation tax credits. TPS, in  consultation with State Historic Preservation Officers (SHPO), also  reviews and approves proposed rehabilitation project designs, and (again  in consultation with SHPOs) certifies completed rehabilitation projects as  conforming to the standards and therefore eligible to claim the  rehabilitation tax credit.
TPS officials explained that to administer the Historic Rehabilitation Tax  Credit program, the agency currently relies on 17 full-time equivalent  positions to staff the program and has a budget of approximately $3.2  million for fiscal year 2015. Additionally, TPS officials stated they planned  to add 4–5 full-time equivalent positions to the program, for a total of 21  or 22. TPS officials explained that they work with IRS to coordinate  elements of program administration, which include the issuance of  regulations, the development of program information (such as on revenue  procedures) for TPS’s website, and training for SHPOs. TPS also shares  program data with IRS, including biannual reports of all program activity  drawn from the project database for the Historic Rehabilitation Tax Credit,  and information about issues and concerns surrounding an individual  project’s eligibility for the credit.
New Markets Tax Credit Program  Congress established the New Markets Tax  Credit to encourage investments in low- income communities that traditionally lack  access to capital. The program provides  investors (individuals, financial institutions,  and other corporations) with a tax credit for  investing in these communities. The investors  can claim a credit equal to 39 percent of  eligible investment spread over 7 years.
New Markets Tax Credit. The CDFI Fund, housed in Treasury, plays the  lead role in administering the New Markets Tax Credit program, which  had about $1 billion in forgone revenue in fiscal year 2014. The Fund  certifies qualified organizations as Community Development Entities  (CDE)—which are entitled to offer these tax credits to investors to attract  private-equity investments to low-income community development  projects. The Fund also reviews CDE applications for allocations of  specific amounts of the New Markets Tax Credit and—for those CDEs  receiving such allocations—prepares allocation agreements that include  the amount of tax credit allocation, approved uses of the allocation,  approved service area, and reporting requirements.
According to CDFI Fund officials, 15 full-time equivalent positions—14  staff and one manager—work full time on New Markets Tax Credit and  another Treasury program, with the majority of staff time devoted to New  Markets Tax Credits. These employees are assisted at various times by  other CDFI Fund staff—for example, legal staff who help to execute  allocation agreements with CDEs and information technology staff who  maintain database systems.
In both programs, we identified oversight and administrative functions  (monitoring, performance measurement, and data collection) that federal  entities other than IRS perform.
subsections: section_title: Monitoring
paragraphs: TPS and the CDFI Fund have primary roles in monitoring programmatic  aspects of the Historic Rehabilitation Tax Credit and New Markets Tax  Credit, while IRS administers and enforces compliance with tax-related  requirements. Conversely, in the LIHTC program, the monitoring role is  split between IRS and HFAs. While IRS has other monitoring  responsibilities for the LIHTC program (beyond ensuring taxpayer  compliance) that include overseeing HFAs, as discussed previously, such  monitoring was lacking or minimal.
Historic Rehabilitation Tax Credit. TPS officials told us that TPS staff  members take approximately 25 work trips annually to states for purposes  such as site visits and training for SHPOs. Site visits typically involve  inspections of multiple projects, including projects identified as good and  as problematic, as well as projects that are proposed, under way, and  completed. TPS officials stated that when they identify deficiencies in a  SHPO’s administration of a Historic Rehabilitation Tax Credit project, they  generally work cooperatively with SHPOs to identify and take corrective  actions.
New Markets Tax Credit. CDFI Fund staff told us they conduct two types  of site visits to CDEs that are performed by different program offices.
The New Markets Tax Credit program office conducts site visits to  gather information about current industry practices, tax credit  transaction costs, best practices in accomplishing outcomes the CDFI  Fund seeks to encourage (such as investing in nonmetropolitan  counties and financing projects that create significant community  outcomes), and emerging trends and practices the CDFI Fund may  want to discourage. The information obtained during these site visits  enables the New Markets Tax Credit staff to administer the program  by informing the contents of the tax credit allocation application or  allocation agreement, or the review and selection process.
The Certification, Compliance Monitoring and Evaluation unit  conducts risk-based site visits. The purpose of these visits includes  determining if a New Markets Tax Credit project was in compliance  with the terms and conditions of its allocation agreement, assessing  circumstances leading to an instance of noncompliance, and  identifying any weaknesses or concerns that may adversely affect the  use of the tax credit allocation. If noncompliance were in question, the  focus of the site visit would be to determine what, if any, corrective  actions were taken by the CDE and progress made in resolving the  noncompliance, implementing the corrective action, or both.
section_title: Performance Measures and Data Collection
paragraphs: TPS and the CDFI Fund collect and report performance measures and  collect data for the Historic Rehabilitation Tax Credit and New Markets  Tax Credit programs, respectively. In contrast, IRS does not report on  performance measures on the LIHTC program; rather, it collects data  from tax forms to oversee HFA program compliance and taxpayer  compliance. As discussed previously, statutory limitations prevent the  sharing of data from tax forms with other federal agencies.
Historic Rehabilitation Tax Credit. TPS publishes an annual report and  a statistical analysis of the Historic Rehabilitation Tax Credit program.  Both reports include performance measures such as the number of jobs  created in association with completed projects and the number of housing  units created with Historic Rehabilitation Tax Credits, including the  number of low- and moderate-income units. The statistical analysis  contains additional detail about the performance measures, historical  data, and state-by-state breakdowns related to qualified rehabilitation  expenditures. In addition, TPS collaborates with Rutgers University to  produce the Annual Report on the Economic Impact of the Federal  Historic Tax Credit. According to TPS officials, to produce these reports,  TPS uses data obtained from the project applications, voluntary user  profiles, and customer satisfaction questionnaires submitted upon project  completion. TPS— unlike HUD in relation to the LlHTC program—has  not encountered data-sharing limitations with IRS stemming from  protections on taxpayer information because it collects these data using  its own forms and documentation.
New Markets Tax Credit. The CDFI Fund uses its Community  Investment Impact System to collect data from CDEs on projects,  including performance measures such as the number of jobs by type;  numbers of rental and for-sale housing units; and the capacity of  educational, child care, and health care facilities developed using New  Markets Tax Credit financing. These data are not collected on IRS forms.  The data are used to produce annual research reports and periodic  research briefs. In addition, the CDFI Fund contracted with the Urban  Institute to conduct a formal evaluation of the New Markets Tax Credit  program, focusing on program design, execution, outputs, and  outcomes.
section_title: HUD’s Experience in Affordable Housing and Working with HFAs May Benefit the LIHTC Program
paragraphs: While multiple federal agencies administer housing-related programs,  HUD is the lead federal agency for providing affordable rental housing.  HUD’s fiscal year 2013 annual performance report and 2015 annual  performance plan reported that it funded about 5.5 million occupied  affordable rental units through its rental assistance programs. Much like  LIHTC, HUD’s rental housing programs rely on state and local housing  agencies (including HFAs) to implement programs. HUD is responsible  for overseeing these agencies, including reviewing state and local  consolidated plans for the HOME and Community Development Block  Grant (CDBG) programs—large grant programs that HUD oversees and  that also are used to fund LIHTC projects. HUD has experience in  directly overseeing HFAs in their roles as contract administrators for  project-based Section 8 rental assistance. HUD also has entered into  risk-sharing agreements with HFAs to provide more insurance on  multifamily loans. Although we and HUD’s Office of Inspector General  have identified weaknesses in evaluation and oversight of programs,  HUD has taken steps to resolve some of these issues. Furthermore, HUD  has processes, procedures, and staff in place for program evaluation and  oversight of state and local agencies that could be built upon and  strengthened.
HUD already has a limited data collection role in the LIHTC program. As  described earlier, HUD voluntarily maintains data on LIHTC properties  and must collect data on tenant characteristics such as race and income.  Unlike IRS, HUD also has sponsored studies of the LIHTC program  based on the data it collects. Furthermore, HUD has strategic goals to  meet the need for quality, affordable rental homes and build strong  resilient and inclusive communities, and an agency priority goal to  preserve and expand affordable rental housing. However, data used to  support these goals do not include all LIHTC projects. With the exception  of these activities, HUD has no statutory authority to oversee HFAs’  LIHTC program responsibilities or set LIHTC program policies and  procedures, and as a result, such authority would require new enabling  legislation.
HUD’s experience in administering affordable housing programs may help  address some of the oversight challenges for LIHTC cited in this report.  Although joint administration of the program will involve dividing  responsibilities for one program across two agencies, we have reported  that mission fragmentation and program overlap sometimes may be  necessary when the resources and expertise of more than one agency  are required to address a complex public need—as in the case of the  Historic Rehabilitation Tax Credit and New Markets Tax Credit  programs. HUD officials indicated that a larger role in the LIHTC  program would be one way to aid their data collection efforts, better  determine whether national affordable housing and fair housing goals had  been incorporated, and better coordinate monitoring of civil rights  compliance among federal housing programs.
IRS also has been challenged to focus on its core mission of helping  taxpayers understand and meet their responsibilities and enforcing tax  laws. IRS’s enforcement of tax laws has been on our high-risk list since  1990. In February 2015, we determined that significant capacity  challenges—such as reduced staffing and examination coverage in an  environment of constrained budgets—and incomplete monitoring of  enforcement program performance have prevented the removal of the  agency from the high-risk list. Moreover, since 2010, the IRS budget has  been reduced about 10 percent and IRS enforcement performance and  staffing levels have declined. And as we discussed previously in this  report, LlHTC receives a small portion of those resources. IRS and  Treasury officials further noted that oversight of individual state HFAs that  award tax credits and monitor projects is a challenge given IRS’s mission  of helping taxpayers meet their responsibilities and enforcing tax laws.
section_title: Joint Administration May Require Additional HUD Resources
paragraphs: Assigning LIHTC programmatic oversight responsibilities to another  agency could involve additional staff and other resources. Specifically,  such oversight responsibilities likely will involve new hiring as well as  training of new and existing staff. According to HUD officials, HUD  currently works with HFAs in various capacities, including administering  HOME and other housing programs. However, an expanded oversight  role in LIHTC would require additional resources. For example, resources  would be needed to expand or build data systems to help HUD monitor  HFAs and program performance. As noted earlier, HUD was statutorily  required in 2008 to collect data on characteristics, such as race and  income, of tenants living in LIHTC projects. HUD officials noted that  collecting such data was challenging because HUD did not receive  additional resources.
In our review of LIHTC and the other two tax credit programs, we found  that each used different mechanisms to fund their administrative  responsibilities. For instance, the Historic Rehabilitation Tax Credit uses  fees to fund its administrative activities, such as issuance of regulations,  the development of program information, and monitoring. In contrast,  the New Markets Tax Credit does not rely on user fees but receives  annual appropriations to fund its activities, such as application reviews,  monitoring, and performance measurement.
For LIHTC, the HFAs partially fund their administration and oversight  responsibilities—which include ongoing compliance inspections and other  reviews—by assessing fees on owners of LIHTC projects. While practices  can differ among the states, according to an annual survey by NCSHA,  HFAs can assess a variety of fees to help offset their administrative costs,  including application fees, reservation fees, carryover allocation fees,  compliance monitoring fees, and penalties and fees related to late or  amended submissions. The amounts of these fees vary from state to  state; for example, LIHTC application fees range from $0 in Alaska to  $6,500 in Georgia.
The level of resources that would be needed to perform an adequate level  of oversight of HFAs is not known. According to HUD officials, estimating  the level of resources needed to perform joint administration of the LIHTC  program is feasible and could be based on HUD’s experience  administering other housing programs. Having an estimate on potential  costs and funding options for financing federal oversight of the LIHTC  program will help HUD and congressional decision makers in assessing  potential changes to the administration of the program.
section_title: Conclusions
paragraphs: Although LIHTC is the largest federal program for increasing the supply of  affordable rental housing, LIHTC is a peripheral program in IRS in terms  of resources and mission. Oversight responsibilities for the program  include monitoring HFAs and taxpayer compliance. However, IRS  oversight of HFAs has been minimal, particularly in reviewing QAPs and  conducting audits of HFAs. Without regular monitoring of HFAs, IRS is  not able to determine the extent to which HFAs comply with program  requirements. Despite the importance of the program in the affordable  rental housing market, program managers and congressional decision  makers do not have sufficient information to assess the program’s  effectiveness.
Significant resource constraints have affected IRS’s ability to oversee  taxpayer compliance and currently preclude wide-ranging improvement to  such functions, but IRS still has an opportunity to enhance oversight of  taxpayer compliance in the LIHTC program. Reliable data on credit  allocations and certifications would enable IRS to assess basic  compliance requirements. IRS has acknowledged the need for  improvements in its controls and procedures (including data entry and  quality reviews). Federal internal control standards state effective  information technology management is critical to achieving useful,  reliable, and continuous recording and communication of information. IRS  officials agreed that these problems should be corrected and data quality  reviews be conducted on an ongoing basis.
Moreover, leveraging the experience and expertise of another agency  with a housing mission, such as HUD, may help offset some of IRS’s  limitations in relation to program oversight. Unlike the jointly administered  Historic Rehabilitation and New Markets tax credit programs, IRS is the  sole federal administrator in LIHTC and HUD has a limited role in the  program. Expanding HUD’s role—making it a joint program  administrator—could enhance LIHTC oversight. Although we and others  have identified weakness in HUD’s evaluation and oversight of programs,  HUD already has processes and procedures in place for evaluation and  oversight of state and local agencies—they constitute a framework on  which further changes and improvements in LIHTC could be effected.  Under joint administration, IRS could continue to retain certain key  responsibilities consistent with its tax administration mission. But  assigning oversight responsibilities to HUD (such as reviewing QAPs,  developing goals and performance measures, and collecting LIHTC data)  could involve additional staff and other resources. The other tax credit  programs we reviewed illustrate some of the different funding  mechanisms such as fees that might be used to help fund new oversight  for LIHTC. An estimate of potential costs and funding options for financing  enhanced federal oversight of the LIHTC program would be integral to  determining an appropriate funding mechanism.
section_title: Matter for Congressional Consideration
paragraphs: To better align program goals with agency missions and improve program  administration and oversight, Congress should consider designating the  Department of Housing and Urban Development as a joint administrator  of the program responsible for oversight.
As part of the deliberation, Congress also should direct HUD to estimate  the costs to monitor and perform the additional oversight responsibilities,  including a discussion of funding options.
section_title: Recommendation for Executive Action
paragraphs: To improve the utility of the credit allocation information contained in  IRS’s database, IRS should address weaknesses identified in data entry  and programming controls to ensure reliable data are collected.
section_title: Agency and Third- Party Comments and Our Evaluation
paragraphs: We provided a draft of this report to HUD, Interior, IRS, and Treasury for  their review and comment. IRS, Treasury, and HUD provided written  comments that we reprinted in appendixes II to IV. IRS and Treasury also  provided technical comments that were incorporated, as appropriate.  Interior did not provide any comments on the draft report. We also  provided a draft to the National Council of State Housing Agencies  (NCSHA), a nonprofit organization that represents the HFAs, for its  review and comment. NCSHA provided written comments that we  reprinted in appendix V.
IRS agreed with our recommendation that it should address weaknesses  in data entry and programming controls to ensure reliable data are  collected. IRS noted that reliable data would enable it to more effectively  assess basic compliance requirements. According to IRS’s comments,  significant resource constraints have affected IRS’s ability to improve its  database and implement other improvements in its procedures and  controls. Additionally IRS noted that its review of hundreds of audits found  no widespread compliance issues and therefore the agency performed no  ongoing tracking of audit results and trends. However, as our report  notes, IRS conducted this analysis in 2000 for a sample of 402 audits of  LIHTC taxpayers performed from 1995 through 1999 and had not  updated this review for nearly 15 years. Federal internal control standards  state that monitoring should occur in the course of normal operations, be  performed continually, and be ingrained in the agency’s operations. As a  result, the agency does not have current knowledge of the level of  noncompliance or if more monitoring were needed. IRS noted that it  expects to take action in response to our recommendation to improve the  utility of the credit allocation information contained in its database and  improve monitoring. IRS did not comment on the matter for congressional  consideration (to designate HUD as a joint administrator of the program  responsible for oversight).
Treasury agreed that it would be useful for HUD to receive ongoing  responsibility for, and resources to perform, research and analysis on the  effectiveness of LIHTCs in increasing the availability of affordable rental  housing. Treasury noted that such research and analysis is not part of  IRS’s responsibilities or consistent with its expertise in interpreting and  enforcing tax laws. However, Treasury stated that responsibility for  interpreting and enforcing the code should remain entirely with IRS.  Similarly, our report notes that under joint administration, IRS could retain  certain key responsibilities consistent with its tax administration mission.  In considering the utility of HUD’s expanded role in LIHTC, Treasury  noted that research and analysis by HUD might help address whether  HFAs’ allocations of LIHTCs affirmatively addressed fair housing  concerns and whether the allocations have been effective in meeting  other congressional goals. Treasury further observed that if HUD’s  research and analysis indicated a need for additional interpretation or  guidance, then Treasury and IRS could improve guidance or change the  approach to enforcement. Coordinating on findings from any analyses  conducted by HUD would be a positive step towards strengthening  oversight of the program. As our report notes, IRS has performed minimal  oversight of HFAs, particularly in terms of analyzing QAPs and  conducting on-site or desk audits of HFAs. Thus, leveraging the  experience and expertise of another agency with a housing mission may  help offset some of IRS’s limitations in relation to program oversight. HUD  could assume certain oversight responsibilities, such as reviewing QAPs  of HFAs, monitoring of HFAs’ compliance with key responsibilities,  identifying goals and performance measures, and collecting more  programwide data.
HUD did not expressly comment on the matter for congressional  consideration (to designate HUD as a joint administrator of the LIHTC  program responsible for oversight). However, it supported consideration  of a structure for enhanced interagency coordination on housing policy,  including the LIHTC program. HUD noted that such a structure could help  ensure the program’s alignment with federal housing goals, such as  creating affordable housing in areas of high opportunity and fueling  reinvestment in high-poverty communities. HUD has conducted dedicated  research on LIHTC; for example, on the effect of incentives in state QAPs  on the location of LIHTC properties. However, HUD noted that Congress  would need to appropriate additional resources to any agency assigned  the responsibility to provide oversight, review QAPs, and conduct further  in-depth research on LIHTC. HUD stated that it did not receive any  appropriations authorized for its collection of LIHTC tenant data, which  delayed HUD’s ability to publicly release data. Our report also notes that  assigning programmatic oversight responsibilities for LIHTC to another  agency could require additional staff and other resources. We examined  other tax credit programs with joint administration and found that each  used varying mechanisms to fund its activities, including user fees and  appropriations, which could serve as examples of how an agency may  fund new oversight of LIHTCs.
NCSHA disagreed with our matter for congressional consideration.  NCSHA stated that if Congress believed more oversight was needed,  NCSHA would prefer to see Congress place those resources within  Treasury and IRS to build on the program expertise in those agencies,  partly because it asserted that HUD has “virtually no experience” with the  LIHTC program. NCSHA noted that state HFAs have worked closely with  Treasury and IRS to ensure proper administration of the program. Our  report recognizes the various ways that IRS officials work with state HFAs  to implement the program, but it also notes significant oversight  deficiencies in IRS’s administration of the program. Our report also  highlights several reasons why HUD may be an appropriate agency to  jointly administer certain aspects of the LIHTC program. First, HUD is the  federal government’s lead housing agency, and as such, has  responsibilities for reporting on federal efforts to meet the nation’s  affordable housing and fair housing goals. Second, HUD has experience  working with HFAs on various programs, including its rental assistance  programs, and through its risk-sharing agreements with HFAs. LIHTC  projects also may be recipients of funds from other federal programs,  including HUD-administered programs such as HOME and project-based  Section 8 rental assistance. Third, HUD has a framework (processes,  procedures, and staff) in place for program evaluation and oversight of  state and local agencies that could be expanded and strengthened.  Finally, HUD already has a data collection role in the LIHTC program.  While this role is limited to mandatory data collection on tenant  characteristics, such as race and income, and voluntarily maintaining data  on LIHTC properties, a joint oversight role could allow HUD to directly  collect nationwide data on LIHTC properties needed to assess program  effectiveness. Whereas currently, statutory restrictions prevent the  disclosure of taxpayer information collected by IRS to HUD. As a result,  we maintain HUD, an agency with a housing mission and whose current  programs regularly interact with the LIHTC program, is in a better position  to perform some oversight functions for LIHTC. Also, in commenting on  this report, Treasury recognized that it would be useful to have HUD  receive ongoing responsibility for research and analysis on the  effectiveness of LIHTCs.
NCSHA also questioned if it was fair of GAO to judge Treasury and IRS  oversight by the amount of data collected or number of audits conducted  and with seemingly little attention to the program’s successful housing  results. In the report, we cite that monitoring should occur in the course of  normal operations, be performed continually, and be ingrained in the  agency’s operations. IRS does not regularly review QAPs or conduct on- site reviews of HFAs. More specifically, IRS had conducted only seven  audits of HFAs since the program’s inception in 1986. IRS officials stated  the lack in oversight was caused by a lack of resources and competing  demands. Furthermore, we note that activities need to be established to  monitor performance measures and indicators, which includes comparing  data so that analyses can be conducted. However, we found that IRS has  not set goals or assessed performance for the program, collected limited  data needed to administer and enforce the tax code, and the data it  collected are not reliable. The LIHTC program is the largest source of  federal assistance for developing affordable rental housing and cost an  estimated $8 billion in forgone revenue in 2014. Therefore, it is critical  that program managers and congressional decision makers have reliable  data available to judge the effectiveness and level of compliance of the  program.
NCSHA also stated that joint administration of the LIHTC program would  create additional red tape (a new level of bureaucracy) and could result in  reduced program effectiveness and housing production. Our review  focused on IRS’s oversight functions, including monitoring taxpayers and  state HFAs and reviewing program data for program effectiveness and  compliance. We did not suggest a comprehensive change to how IRS  administers LIHTC. Rather, we recommend an approach to provide  Congress and taxpayers with a greater understanding of how the program  operates and performs. In our review of other tax credit programs (similar  in purpose and structure to LIHTC) that were jointly administered by IRS  and other federal agencies, we found the other federal agencies provided  key oversight and administrative support, such as monitoring,  performance measurement, and data collection. Under joint  administration with HUD, IRS, with its tax expertise, could continue to  retain certain key responsibilities in implementing the program in  partnership with state HFAs. Joint administration of the program will  involve dividing responsibilities for one program across two agencies, and  our expectation would be that IRS and HUD will carefully define their  respective roles and responsibilities and have clear lines of  communication to help ensure the program does not create any  unnecessary inefficiencies, such as duplicative or overlapping  requirements for HFAs.  In addition, Congress can define specific  requirements and limits of each agency’s oversight responsibilities.
Finally, NCSHA noted that HFAs have a track record of outstanding  performance in affordable housing finance and that Congress and the  Administration entrusted HFAs to administer federal housing programs. In  addition, NCSHA stated GAO had positively recognized HFAs for the  LIHTC program in past reports. We acknowledged in our report that the  LIHTC program was the largest federal program for increasing the supply  of affordable rental housing and the design of the program can result in  HFAs and other entities, including investors and syndicators, providing  project oversight. We also made these points in prior work. But we also  noted in prior work dating to 1997 that procedures for reviewing QAPs  and monitoring compliance could be improved, and that LIHTC data were  not sufficient to measure program success. Joint administration with an  agency with a housing mission could help offset these longstanding  deficiencies in IRS’s oversight of the program.
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, Interior, 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 VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report discusses the Low-Income Housing Tax Credit (LIHTC)  program, which is administered by the Internal Revenue Service (IRS)  and state housing finance agencies (HFA). More specifically, this report  (1) discusses how the LIHTC program is administered; (2) evaluates  processes for overseeing the LIHTC program; and (3) compares the  administration of other tax credit programs with LIHTC.
To determine how the LIHTC program is administered, we reviewed IRS  regulations and guidance that describe IRS’s roles and responsibilities in  administering the LIHTC program, including overseeing HFAs and  taxpayers. We also reviewed documentation on the role of HFAs,  investors, and syndicators in the program. Because LIHTC projects are  often financed with funds from other programs, we reviewed the  monitoring requirements for some federal programs present in LIHTC  projects, such as the HOME Investment Partnerships (HOME) program  and project-based Section 8. To illustrate the number of LIHTC projects  containing other federal funding, we also reviewed a publication issued by  the National Council of State Housing Agencies (NCSHA) on survey  results. We assessed the reliability of these data by interviewing NCSHA  officials and reviewing documentation on survey techniques used to  collect the data. We determined the data were reliable for our purposes of  reporting on other funding sources for LIHTC projects. We interviewed  officials from IRS, the Department of the Treasury (Treasury), Department  of Housing and Urban Development (HUD), selected HFAs, and NCSHA  on the administration of the program. We also conducted interviews at the  Georgia HFA and Illinois HFA to help provide examples of how the  programs were administered at the state level. We selected these two  HFAs based on prior work conducted at these locations for other GAO  reports on the Tax Credit Assistance Program (TCAP), administered by  HUD, and the Grants to States for Low-Income Housing Projects in Lieu  of Low-Income Housing Credits (Section 1602) program, administered by  Treasury. Our prior work is relevant because it assessed HFA  administration and oversight of these programs and because we discuss  TCAP and 1602 in this report. We also selected these sites because of  their proximity to GAO locations. Moreover, we interviewed a certified  public accounting and consulting firm, Novogradac & Company LLP. We  selected this firm because of its role in the LIHTC working group—a  forum for participants in the LIHTC program to work together to resolve  technical and administrative issues relating to the LIHTC program—and  because of the information on the firm’s website on HFAs and guidance  for the LIHTC program.
To evaluate processes for overseeing the LIHTC program, we reviewed  applicable forms and guidance used to monitor the program, and  reviewed IRS audits of HFAs conducted from 2003 to 2014 to determine  the frequency with which audits were conducted and the types of findings  identified. We reviewed IRS’s process for identifying and conducting  audits on taxpayers claiming LIHTCs from 2001 to 2013 and how the  results of these audits were used to inform management about the types  of noncompliance and to track the effectiveness of program monitoring.  We reviewed federal internal control standards to identify key activities  that help ensure that a program addresses requirements and appropriate  actions are taken to address program risks. We also reviewed the  strategic and annual reports of IRS, Treasury, and HUD to determine the  program goals and outcome information available for the LIHTC program.  We analyzed information contained in IRS’s Low-Income Housing Credit  database from December 2005 to August 2014. Specifically, we reviewed  available information from forms on the credit allocation and certification  (form 8609) and the noncompliance or building disposition (form 8823).  We assessed the reliability of the database by reviewing documentation,  performing electronic testing, and interviewing the relevant officials  responsible for administering and overseeing the database. We also  conducted reasonableness checks on the data to identify any missing,  erroneous, or outlying figures. We determined we would not be able to  rely on the data to perform our analysis. Therefore, we limited our  discussion of the database to the type of information collected, the extent  to which the information was collected, and potential analysis that could  be conducted if the data were more complete and accurate. We also  reviewed an IRS staff proposal for statutory changes to allow IRS to  disclose certain protected information so that HUD could help assess the  completeness of the data it received on LIHTC tenant characteristics and  reviewed a prior GAO report that discussed statutory exceptions related  to data sharing of confidential taxpayer information. Lastly, we  interviewed IRS and selected HFA officials about monitoring procedures  for the LIHTC program and Treasury and HUD officials on program goals  and outcomes and statutory barriers that may prevent information sharing  for the LIHTC program.
To compare the administration of other tax credit programs with LIHTC,  we reviewed tax credit programs administered by IRS to identify those  that are most similar in purpose and structure to LIHTC. We focused on  the Historic Rehabilitation Tax Credit and New Markets Tax Credit  programs because, similar to the LIHTC program, both are aimed at  encouraging community development and each is jointly administered by  IRS and another federal entity—the Department of Interior’s National Park  Service (NPS) and Treasury’s Community Development Financial  Institutions (CDFI) Fund, respectively. In addition to administrative  structures, our review focused on how these two programs conducted  monitoring, used performance measures, and collected data. We  reviewed prior GAO reports related to each of these programs.  Moreover, we reviewed HUD’s role in working with state and local  agencies and its role in the LIHTC program. We also reviewed  information available in the State HFA Factbook: NCSHA 2012 Annual  Survey Results to gain an understanding of how HFAs use fees to  administer the LIHTC program. We assessed the reliability of these data  by interviewing NCSHA officials and reviewing documentation on survey  techniques used to collect the data. We determined the data were reliable  for our purposes of reviewing how HFAs use fees to administer the LIHTC  program. Additionally, we interviewed officials from the Departments of  Interior and Treasury and the CDFI Fund concerning the administration of  the Historic Rehabilitation Tax Credit and New Markets Tax Credit  programs and how the programs funded administrative costs. We met  with IRS officials to discuss their role in the administration of the Historic  Rehabilitation Tax Credit.
We conducted this performance audit from February 2014 through July  2015 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 Internal Revenue Service
section_title: Appendix III: Comments from the Department of the Treasury
section_title: Appendix IV: Comments from the Department of Housing and Urban Development
section_title: Appendix V: Comments from the National Council of State Housing Agencies
section_title: Appendix VI: 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), Nadine Garrick Raidbard (Analyst-in-Charge), Jessica Artis,  Vaughn Baltzly, William R. Chatlos, Anar N. Jessani, Elizabeth Jimenez,  John McGrail, Marc Molino, Ruben Montes de Oca, Christine Ramos,  Barbara Roesmann, and MaryLynn Sergent made major contributions to  this report.