Responding to a request from Senator Charles Grassley, Chairman of the Senate Judiciary Committee, the Government Accountability Office (GAO) as performed a review of the oversight and administration of the Low-Income Housing Tax Credit (LIHTC) Program. The results of the study were sent to Senator Grassley on July 15, 2015.
Based on its findings, the GAO recommends that Congress consider designating HUD as a joint administrator of the LIHTC program. According to the GAO, HUD’s role should include “oversight responsibilities (such as regular monitoring of HFAs) to help address deficiencies GAO identified.” The Department of Treasury agreed that HUD could be responsible for analyzing the effectiveness of LIHTC, with IRS continuing to enforce tax law. The National Council for State Housing Finance Agencies (NCSHA) disagreed with the GAO recommendations.
The GAO Findings
The opinion expressed in the GAO study is that IRS oversight of the LIHTC program has been minimal. The GAO supports this position by pointing out that since 1986, the IRS has audited only seven of the 56 Housing Finance Agencies (HFAs) that administer and oversee the program. The IRS selected the Agencies to audit based on press accounts and HFA self-reporting about lack of adherence with program compliance requirements. The first of these audits was undertaken in 2003. (The GAO report did not reveal the States that were audited). Examples of audit findings include the following:
- Written HFA policies conflicted with the requirements in the code or Treasury regulations;
- Qualified Allocation Plans (QAP) did not address all compliance requirements in the regulations or was outdated;
- Annual reports to the 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; and
- Physical inspections and tenant file reviews were not completed as required and notifications to owners were not conducted as required.
The study points out that the 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 study states that the IRS is no well positioned to oversee the LIHTC. Since 1990, the IRS has been on GAO’s high-risk list due to significant capacity challenges and incomplete monitoring of tax law enforcement.
The GAO believes that joint administration of the program with HUD would better align program responsibilities with each agency’s mission and more efficiently address existing oversight challenges. Under joint oversight, the IRS would retain responsibilities consistent with administering the tax code.
Taxpayer Audits
While the IRS has conducted audits of taxpayers claiming the LIHTC, the Agency does not maintain detailed information on the audits. In 2000, the IRS had completed a review of a sample of 402 audits of LIHTC taxpayers performed from 1995-1999 (an average of about 100 audits annually) to determine a compliance level by taxpayers claiming the LIHTC and types of noncompliance. According to the IRS, the review did not find evidence of widespread noncompliance with the code. According to the IRS, the agency has completed an additional 555 audits (an average of about 40 annually) from 2001 to 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. In 24 percent of cases, taxpayers agreed to make changes to the amount of credit claimed. Remaining cases either were not pursued due to the statute of limitations (23 percent), the audit was continued (10 percent), or the IRS closed the case because the taxpayer disagreed with the audit results and requested to go to court (10 percent). (The percentages total less than 100 due to rounding in the study). The study cites as a major weakness the lack of data analysis on the outcome of audits. As a result, information on commonly occurring issues and reasons for taxpayer noncompliance related to the LIHTC program is not available, making agency oversight less efficient.
Goal Setting
The study states that although the IRS is the only federal agency responsible for overseeing LIHTC program compliance, it does not set goals or assess performance for the program. The GAO believes this weakness could be alleviated by HUD participation, since HUD has traditionally played a strong oversight role in federal housing programs.
Report Conclusions
The report concludes that IRS oversight of the LIHTC program has been minimal, particularly in the review of HFA performance and compliance. The GAO states that “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.”
However, the IRS still has an opportunity to enhance oversight of taxpayer compliance in the LIHTC program. This will require improvement in the current controls and procedures of the IRS relating to data entry and quality reviews.
Leveraging the experience and expertise of HUD may help offset some of the IRS’s weaknesses in program oversight. Expanding HUD’s role – making it a joint program administrator – could enhance LIHTC oversight, according to the GAO. Under joint administration, IRS could continue to retain certain key responsibilities consistent with administration of the tax code. But HUD would oversee program issues such as reviewing QAPs, developing goals and performance measures, and collecting LIHTC data.
Recommendation to Congress
The GAO recommendation is as follows: “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.”
What Will Happen Next?
This is clearly an important and perhaps far-reaching study that will greatly impact the LIHTC program going forward. Those who have been involved with the program since it’s inception may shudder at the thought of increased HUD involvement, knowing how HUD tends to micromanage all programs in which it is involved. One of the strengths of the LIHTC program is that it is essentially a state housing program that uses federal tax credits as an equity generator. HUD has too often shown an inability to understand state and local housing needs. If IRS oversight is not strong enough, Congress should consider allocating additional resources to the IRS, which will enable the Agency to improve its performance.
Like many GAO studies, this one may languish and collect dust before it is given any consideration before Congress. However, with tax reform likely in the next two years, programs like the LIHTC will be given increasing scrutiny by members of Congress. This study will play a role in that scrutiny. Participants in the LIHTC program should pay close attention to Congressional actions and discussions relative to tax reform, and should begin discussing the success of the program with elected officials at all levels of government – state as well as federal. Maintaining control over housing decisions at the State level – within the context of adherence to the federal tax code – is critical for the long-term survivability of the program.