GAO Report Criticizes Treasury/IRS Oversight of LIHTC, Recommends Joint IRS-HUD Administration

Published by Michael Novogradac on Friday, July 24, 2015 - 12:00am

On July 23, Sen. Chuck Grassley, R-Iowa, released a report he commissioned from the U.S. Government Accountability Office (GAO) on the federal administration of the low-income housing tax credit (LIHTC) program. The report criticizes LIHTC oversight from the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS), compares the federal oversight of LIHTC to that of the historic tax credit (HTC) and the new markets tax credit (NMTC), and suggests Congress consider establishing joint IRS-U.S. Department of Housing and Urban Development (HUD) federal administration of the LIHTC.

In its critique of IRS oversight, the report found:

1. IRS oversight to identify and address compliance issues has been minimal

As part of this finding, the GAO reported that the IRS has since 1986 only audited seven housing finance agencies (HFAs) out of the 56 HFAs that allocate LIHTCs, and that it did not start auditing HFAs until 2003. The GAO claimed that because the IRS did not conduct more frequent and thorough in-person or desk audits, it could not evaluate whether:

  • HFA policies conflicted with the Internal Revenue Code (IRC),
  • qualified allocation plans (QAPs) adequately addressed all compliance requirements,
  • HFA annual reports to the IRS were accurate,
  • all Form 8823 reports for noncompliance were submitted as required, or
  • physical inspections and tenant file reviews were completed as required.

However, the GAO did not provide any evidence to suggest that there was widespread noncompliance by HFAs.

2. IRS has conducted some audits of taxpayers claiming LIHTCs but does not have detailed information on results of these audits

The GAO reported that the IRS completed approximately 1,000 audits of taxpayers claiming LIHTCs from 1995-2013. From 1995-1999, the IRS did not find evidence of widespread noncompliance. Of the audits conducted in 2001-2013:

  • approximately 29 percent resulted in no change in LIHTC claimed,
  • 24 percent resulted in the taxpayer agreeing to make changes to the credit claimed,
  • 23 percent resulted in the IRS not pursuing changes because the statute of limitation was approaching,
  • 10 percent resulted in continued audits, and
  • 10 percent were closed because the taxpayer requested adjudication.

The GAO criticized the lack of IRS analysis of these audits to better target future compliance work. However, again, these results did not suggest widespread taxpayer noncompliance.

3. IRS has not set goals for LIHTC and does not assess performance

The GAO criticized the fact that the IRS uses the data it collects only for tax administration and code enforcement, as opposed to qualitatively assessing the performance of the LIHTC in producing affordable housing. Many in the LIHTC community would argue that IRS is correct to focus on tax administration and code enforcement and leave program evaluation to the HFAs, given that each state has a different qualified allocation plan, with corresponding different goals and performance targets.

4. IRS data were not reliable to assess compliance and taxpayer protections prevent HUD from using IRS data

The GAO noted that IRS LIHTC database was inadequate and only captured about 2 percent of the 168,000 Form 8823s submitted since 2009. Furthermore, because of statutory restrictions that prevent the disclosure of taxpayer information to other federal agencies, the GAO reported it is difficult for HUD to meet the congressional mandate from the Housing and Economic Recovery Act of 2008 (HERA) to collect data on LIHTC tenant racial and income demographics.

The GAO compared the federal administration of the LIHTC to that of the HTC and NMTC, favorably assessing the involvement of the National Park Service’s (NPS) Technical Preservation Services (TPS), a unit of the U.S. Department of the Interior, in administering the HTC and Treasury’s Community Development Financial Institutions (CDFI) Fund in administering the NMTC. Given GAO’s negative assessment of the IRS’s sole federal oversight of the LIHTC and the GAO’s positive assessment of the joint administration with other federal agencies for the HTC and NMTC, it is not surprising that the GAO recommends that HUD jointly administer the LIHTC with the IRS, and suggest Congress provide more resources to HUD for administration.

But this recommendation begs the question of congressional intent. When Congress created the LIHTC as part of the Tax Reform Act of 1986, it was well aware of the existence of HUD, its prior experience of affordable housing program administration and the joint federal agency administration of the HTC. Despite this, Congress chose to devolve responsibility of non-tax and non-code enforcement LIHTC administration to state agencies, recognizing that each state has different needs and priorities for affordable housing and it didn’t make much sense to have a one-size-fits-all approach to program administration.

There’s also the question of whether HUD would be able to carry out such a role. As part of its recommendation for HUD joint administration, the GAO report suggests HUD should review QAPs, develop goals and set performance measures. Given the broad discretion permitted in the tax code for each state to set its own QAP and the legislative history in devolving responsibility for administration, it is difficult to conceive how HUD would perform the QAP reviews, which goals it would develop and how it would evaluate performance.

And given the federal discretionary budget pressures, Congress has not even provided the resources necessary to carry out the mandate to collect LIHTC tenant data, much less joint administration of the program as a whole. It would not appear likely that Congress would follow through on the GAO’s recommendation, either on joint administration or more resources.

Anyone considering the GAO’s recommendations should be aware of what has been found by many other LIHTC program reviews. For example, Harvard University’s Joint Center on Housing Studies, considered to be one of the nation’s premier housing research entities, has repeatedly evaluated the performance of the LIHTC, noted its tremendous achievements and recently suggested it should be expanded. Even without the joint administration role, HUD has conducted plenty of LIHTC research and actively participates in the administration’s interagency working group on rental housing.

While the GAO’s findings are worth noting, they should be considered in the larger context of the affordable housing landscape and the voluminous evidence of the LIHTC’s success. In light of what is known about the LIHTC program’s performance, namely that it is successful and effective, the report’s recommendation would be an unnecessary intervention unlikely to gain adequate funding from an already financially strained Congress.

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