On July 16, 2021, Novogradac updated its Privacy Notice for California Residents. You should review this updated Privacy Notice before continuing to use our site. By continuing to use our site, you agree to this updated Privacy Notice.
New IRS Compliance Rule Will Cause Problems for LIHTC Agencies, Owners, Property Managers and Tenants
On Feb. 26, 2019 the Internal Revenue Service (IRS) published final regulations regarding low-income housing tax credit (LIHTC) allocating agencies’ responsibilities for monitoring properties’ compliance. The provisions replaced temporary requirements contained in Rev. Proc. 2016-15 and represent a significant departure from current practices.
Although the contents have been known for several months, few LIHTC professionals outside of agencies have focused on their importance. Such a lack of attention may seem understandable until taking a closer look at the specific consequences.
The new regulation:
- dramatically increases the number of units agencies must monitor;
- reduces the number of days’ advance notice before a visit, and
- prevents owners knowing the specific apartments until the day of the inspection.
The IRS provided rationales for the above, but none involved responding to an increase in noncompliance.
These changes matter for those outside of LIHTC allocating agencies. Also, absent last-ditch efforts currently underway to blunt the negative consequences, the impacts will go into effect in 2020. LIHTC property owners and property managers should begin preparing to adapt soon.
Background and the Administrative Procedures Act
A complete discussion of how the federal Administrative Procedures Act (APA) applies to IRS actions is beyond the scope of this post. However, it is worth noting a few key points to illustrate whether the IRS followed the intent behind the law.
Generally speaking, the APA requires notice of “the terms or substance of the proposed rule or a description of the subjects and issues involved.” The purpose is to ensure interested parties have an opportunity to comment beforehand. Whether this occurred for the new regulation is debatable.
The primary warning was in the preamble to the 2016 temporary regulations:
For projects with a relatively smaller number of low-income units, physical inspection or low-income certification review of a randomly chosen 20 percent of those units may not produce a sufficiently accurate estimate of the remaining units’ overall compliance with habitability or low-income requirements. Accordingly, not later than when these temporary regulations are finalized, the Treasury Department and the IRS intend to consider whether Rev. Proc. 2016–15 should be replaced with a revenue procedure that does not permit use of the 20 percent rule in those circumstances. (emphasis added)
The other foreshadowing occurred seven years ago; Notice 2012-18 asked for input regarding compliance monitoring expectations.
These statements and questions are how the IRS gave advance notice. There was no release of specific changes for public comment. As a result, the requirements came as a complete surprise to even the most tuned-in LIHTC professionals. Even worse is that the IRS missed out on learning about seriously problematic unintended consequences. Regardless of whether the process violated the APA, what happened undoubtedly went against the spirit of the law.
The National Council of State Housing Agencies (NCSHA) and its members have been solitary voices in attempting to dial back the effects of what is now a final regulation. Much of this post draws from their materials.
How Inspections Will Increase
Previously the requirement was for agencies to conduct physical inspections and low-income certification reviews for the lesser of
- 20 percent of the units in a property, or
- the number provided in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart.
The new regulation eliminates the 20 percent threshold, meaning the following are what agencies must monitor going forward:
According to NCSHA, the median size of a LIHTC property in the Department of Housing and Urban Development’s Placed in Service (PIS) database is 44 units, and in 15 states more than half of LIHTC properties have 30 or fewer. For such developments the agency will have to inspect twice as many apartments.
Making matters worse, the number is not actually determined by the property as a whole, but rather based on the owner’s Form 8609 line 8b election. Individual buildings within a development may be considered separate projects.
Consequences for Agencies, Owners, Property Management and Tenants
NCSHA surveyed its member agencies and shared the following descriptions of the impacts:
- Wisconsin- an increase of more than 150 percent
- North Dakota- double the compliance burden
- Indiana- adding more than 1,000 units
- Texas- would need to hire 11 additional full-time employees
There are effects in every state. In general, the new regulation hits rural areas the hardest, where properties are smaller and spread further apart.
As a result agencies will need to implement some combination of raising compliance fees, using resources which otherwise would go to programs, and/or reducing oversight of properties in the extended use period. For example, in North Carolina the fee for a 44 unit property will increase from $39,600 to $52,800 (paid up-front).
Each added unit is another low-income family who must to accept strangers into every room of their home. On the other extreme, many properties past the year 15 mark will have no monitoring at all, meaning the tenants are on their own to enforce the extended use commitment provisions.
Inspecting more apartments also lengthens how long agency staff must stay at properties. What was a one-day visit will take two or three, thereby demanding far more time and expense on the part of property management.
Inadequacy of 15 Days Advance and Day-Of Notices
The maximum advance notice period owners will receive dropped from 30 to 15 days. In states where the agency schedules several visits together, some properties would have 14, 13 or fewer.
Furthermore, agencies cannot provide owners a list of the apartments to be inspected. Tenant files often are not electronic or kept onsite, necessitating physically bringing the records for every unit. Doing so is a serious burden when the owner’s or manager’s office is in another state. Again, there will be at most two weeks to make such arrangements.
While tenants should receive a general notice of a possible inspection, they will not know their apartment will be inspected until that very day. The intent is to limit owners’ ability to prepare, however the effect does not reflect a great deal of respect for the households themselves. Implementation may even be impossible in jurisdictions where the residents must have the option of being present or may result in tenants taking time off work or making arrangements to have peets or children out of the unit only to have their unit not inspected.
NCSHA and its members are diligently working to dial back the worst of the problems described above. No doubt they would welcome others joining their efforts.
Hopefully the IRS will listen, pull back the new regulation, and carry out a legally and practically adequate comment process. If not, owners and property managers should prepare for what will be greater burdens with no offsetting benefits.