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. IRS Oversight of HFAs Has Been Minimal

IRS oversight of HFAs has been minimal, particularly in terms of  reviewing QAPs and conducting on-site or desk audits of HFAs. 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. 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. 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. IRS’s enforcement of tax laws has been on our high-risk list since  1990. Moreover, since 2010, the IRS budget has  been reduced about 10 percent and IRS enforcement performance and  staffing levels have declined. In our review of LIHTC and the other two tax credit programs, we found  that each used different mechanisms to fund their administrative  responsibilities. The level of resources that would be needed to perform an adequate level  of oversight of HFAs is not known. 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. Oversight responsibilities for the program  include monitoring HFAs and taxpayer compliance. Without regular monitoring of HFAs, IRS is  not able to determine the extent to which HFAs comply with program  requirements. 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. Matter for Congressional Consideration

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. 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. IRS did not comment on the matter for congressional  consideration (to designate HUD as a joint administrator of the program  responsible for oversight). However, it supported consideration  of a structure for enhanced interagency coordination on housing policy,  including the LIHTC program. 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. 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. 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. Appendix I: Objectives, Scope, and Methodology

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). 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. 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.
Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

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.