Specifically, allocating agencies must allocate at least 10 percent of the state housing credit ceiling to  projects involving qualified nonprofit organizations; execute an extended low-income housing commitment of at least 30  years (of which the first 15 years is the compliance period) before a  building can receive credits;  require developers to hire an agency-approved third party to conduct  a comprehensive market study of the housing needs of low-income  individuals in the area to be served by the project before the credit  allocation is made; provide a written explanation to the general public if the agency  makes an allocation that is not in accordance with established  priorities and selection criteria; and notify the chief executive officer (or the equivalent) of the local  jurisdiction where the building is located, and provide the official a  reasonable opportunity to comment on the project. Agencies Implemented Requirements for Allocation Plans and Award Credits in Varied Ways; IRS Has Not Reviewed the Plans or Agency Criteria

		Most Agencies Did Not Explicitly Cite All Required Preferences and Selection Criteria in Qualified Allocation Plans

Based on our review of 58 QAPs and our site visits, we found the QAPs  did not consistently contain, address, or mention preferences and  selection criteria required in Section 42, but we found that some allocating  agencies incorporated the information into other LIHTC program  documents, or implemented the requirements in practice. As a result of IRS’s lack of regular oversight of the  allocating agencies, we concluded in July 2015 that IRS is not well  positioned to provide this type of oversight because of its tax compliance  mission and recommended that Congress consider designating HUD as a  joint administrator of the program to better align program responsibilities  with each agency’s mission and more efficiently address existing  oversight challenges, including a lack of regular review of QAPs. Additionally, over one-third of the QAPs reviewed cited letters of support  from local governments. In Texas, concerns also have been raised about the requirement, but its  allocating agency continues to require letters of support. Selected Agencies Have Procedures to Assess Reasonableness of Development Costs, but IRS Is Not Well Positioned to Examine How Agencies Award Credit Boosts

		Selected Agencies Determine Award Amounts for Projects Differently and Use Various Cost Limits and Benchmarks to Determine Reasonableness of Costs

Section 42 states that allocating agencies must consider the  reasonableness of costs and their uses for proposed LIHTC projects,  allows for agency discretion in making this determination, and also states  that credits allocated to a project may not exceed the amount necessary  to assure its feasibility and its viability as a low-income housing project. IRS also does not review forms with certain  noncompliance issues for audit potential. HUD, through the Rental Policy  Working Group, has started to collect physical inspection results of LIHTC  properties electronically, but the division within IRS responsible for the  LIHTC program was unaware of this effort. HUD officials  noted that they use these analyses to provide feedback to states about  the condition of their properties. IRS oversight of allocating  agencies continues to be minimal, particularly in reviewing QAPs and  allocating agencies’ practices for awarding discretionary basis boosts. Recommendations for Executive Action

GAO is making the following three recommendations:  To receive more consistent information on LIHTC noncompliance, the IRS  Commissioner should collaborate with the allocating agencies to clarify  when allocating agencies should report such information on the Form  8823 (report of noncompliance or building disposition). IRS agreed that it should improve noncompliance reporting and data  collection, but added that it would have to consider whether it has the  resources to implement the recommendations. IRS noted that the working group was established to  address fair housing concerns and cannot address tax matters. As we state in the report, IRS could have a better  understanding of the prevalence of noncompliance by using REAC’s  computerized data on and analysis of the physical condition of  properties—a capability that IRS does not currently have. While we understand that IRS has limited resources, leveraging HUD’s  work with the Rental Policy Working Group pilot and accessing REAC’s  computerized system could result in cost savings. For example, this report shows that HUD could apply its  experience in administering affordable housing programs—including  collecting physical inspection data, analyzing noncompliance trends, and  reviewing fair housing issues—that could result in guidance to support the  work done at the allocating agencies. IRS would still retain all  responsibilities related to tax law enforcement. Key contributors to this report are listed in  appendix V.

Appendix I: Objectives, Scope, and Methodology

This report discusses how state and local allocating agencies administer  the Low-Income Housing Tax Credit (LIHTC) program and any oversight  issues the allocating agencies or the Internal Revenue Service (IRS) face  in implementing the program. The QAPs we reviewed were from all 50 states, the District  of Columbia, Puerto Rico, American Samoa, Guam, the Northern Mariana  Islands, the U.S. Virgin Islands, and the cities of Chicago and New York  City, for a total of 58 QAPs. In addition, we visited nine allocating agencies to observe the processes  used to award tax credits, assess the reasonableness of development  costs, and monitor compliance of properties. To describe how allocating agencies award LIHTCs, we reviewed the  Code, Treasury regulations, and guidance. We interviewed officials from IRS and Treasury about  agencies’ practices for submitting Form 8823 and how IRS records  information in its Low-Income Housing Credit database.
Why GAO Did This Study

LIHTC encourages private-equity investment in low-income housing through tax credits. The program is administered by IRS and allocating agencies, which are typically state or local housing finance agencies established to meet affordable housing needs of their jurisdictions. Allocating agency responsibilities (in Section 42 of the Internal Revenue Code and regulations of the Department of the Treasury) encompass awarding credits, assessing reasonableness of project costs, and monitoring projects. GAO was asked to review allocating agencies' oversight of LIHTC. This report reviews how allocating agencies administer the LIHTC program and identifies any oversight issues. GAO reviewed regulations and guidance for allocating agencies; analyzed 58 allocation plans (from 50 states, the District of Columbia, U.S. territories, New York City, and Chicago); performed site visits and file reviews at nine selected allocating agencies; and interviewed IRS and HUD officials.
This is a public version of a sensitive report that GAO issued in May 2016 and does not include details that IRS deemed tax law enforcement sensitive.

What GAO Found

Allocating agencies that administer the Low-Income Housing Tax Credit (LIHTC) program have certain flexibilities for implementing program requirements and the agencies have done so in various ways. Although GAO found that allocating agencies generally have processes to meet requirements for allocating credits, reviewing costs, and monitoring projects, some of these practices raised concerns:
More than half of the qualified allocation plans (developed by 58 allocating agencies) that GAO analyzed did not explicitly mention all selection criteria and preferences that Section 42 of the Internal Revenue Code requires.
Allocating agencies notified local governments about proposed projects as required, but some also required letters of support from local governments. The Department of Housing and Urban Development (HUD) has raised fair housing concerns about this practice, saying that local support requirements (such as letters) could have a discriminatory influence on the location of affordable housing.
Allocating agencies can increase (boost) the eligible basis used to determine allocation amounts for certain buildings at their discretion. However, they are not required to document the justification for the increases. The criteria used to award boosts varied, with some allocating agencies allowing boosts for specific types of projects and one allowing boosts for all projects in its state.
In a July 2015 report, GAO found that Internal Revenue Service (IRS) oversight of allocating agencies was minimal and recommended joint administration with HUD to more efficiently address oversight challenges. GAO's work for this review continues to show that IRS oversight remains minimal (particularly in reviewing allocation plans and practices for awarding discretionary basis boosts) and that action is still warranted to address GAO's prior recommendation. In this report, GAO also identified the following issues related to managing noncompliance information from allocating agencies:
IRS provides discretion to allocating agencies for reporting noncompliance data, and has not provided feedback about data submissions. Consequently, allocating agencies have been inconsistently reporting these data to IRS.
IRS has not used the information that it receives from allocating agencies to identify trends in noncompliance. GAO's analysis shows that IRS had recorded only about 2 percent of the noncompliance information it received since 2009 in its database.
IRS has not used key information when determining whether to initiate an audit, potentially missing opportunities to initiate LIHTC-related audits.
In contrast, HUD collects and analyzes housing data, and through a Rental Policy Working Group initiative, now adds LIHTC inspection results to its database. The IRS division responsible for LIHTC was unaware of this effort and is not involved with the working group. By participating in the working group, IRS could leverage HUD data to better understand the prevalence of noncompliance in LIHTC properties and determine whether to initiate audits.

What GAO Recommends

GAO recommends that IRS clarify when agencies should report noncompliance and participate in the Rental Policy Working Group to assess the use of HUD's database to strengthen IRS oversight. IRS agreed it should improve its noncompliance data, but also stated that it had to consider resource constraints. HUD supported using its expertise and experience administering housing programs to improve LIHTC.