Role of Allocating Agencies

State and local allocating agencies are responsible for day-to-day  administration of the LIHTC program based on Section 42 of the Internal  Revenue Code and Treasury regulations. Allocating agencies then  competitively award the tax credits to owners of qualified rental housing  projects that reserve all or a portion of their units for low-income tenants,  consistent with the agencies’ QAPs. Monitoring 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. Monitoring compliance. The  agencies also have reporting and notification requirements. Projects for which these syndicators raised equity in 2005–2014  represented an estimated 75 percent of all LIHTC properties placed-in- service in that period. However, some of these  practices raised concerns. Agencies Implemented Requirements for Allocation Plans and Award Credits in Varying Ways

In our 2016 report, we generally found that allocating agencies  implemented requirements for QAPs in varying ways and had processes  in place to meet requirements for awarding the tax credit. Reasonableness of costs. IRS Oversight of LIHTC Has Been Minimal

Our prior reports found IRS conducted few reviews of allocating agencies  and had not reviewed how agencies determined basis boosts. In our 2016 report,  we found IRS had not reviewed the criteria allocating agencies used to  award discretionary basis boosts. Additionally, IRS officials explained  that because the overall amount of subsidies allocated to a state is  limited, the inherent structure of the program discourages states from  oversubsidizing projects. Based on our analysis of the information in the database, we found in  2015 that the data on credit allocation and certification information were  not sufficiently reliable to determine if basic requirements for the LIHTC  program were being achieved. Until  IRS implements its plan to improve the data, this recommendation will  remain open. In our 2016 report, we also found inconsistent reporting on the  noncompliance forms, the reasons for which included conflicting IRS  guidance, different interpretations of the guidance by allocating agencies,  and lack of IRS feedback about agency submissions. Moreover, in our 2016 report we  found IRS had not taken advantage of the important progress HUD made  through the Rental Policy Working Group (working group)—which was  established to better align the operation of federal rental policies across  the administration—to augment its databases with LIHTC property  inspection data. We recommended that staff from the division participate in the physical  inspection initiative of the working group and also recommended that the  IRS Commissioner evaluate how IRS could use HUD’s real estate  database, including how the information might be used to reassess  reporting categories on Form 8823 and reassess which categories of  noncompliance information to review for audit potential. As of March  2017, IRS had implemented our recommendation to include the  appropriate staff at the working group meetings. Leveraging Experience of HUD May Augment IRS’s Capacity to Oversee Program

Both our 2015 and 2016 reports found that opportunities existed to  enhance oversight of the LIHTC program, specifically by leveraging the  knowledge and experience of HUD. We found in 2015 that while LIHTC is  the largest federal program for increasing the supply of affordable rental  housing, LIHTC is a peripheral program in IRS in terms of resources and  mission. Oversight responsibilities for the program include monitoring  allocating agencies and taxpayer compliance. However, it has voluntarily  collected project-level information on the program since 1996 because of  the importance of LIHTC as a source of funding for affordable housing. In our 2015 report, we also discussed HUD’s experience in working with  allocating agencies. HUD has processes,  procedures, and staff in place for program evaluation and oversight of  state and local agencies that could be built upon and strengthened. As of July 2017, Congress had not enacted  legislation to give HUD an oversight role for LIHTC.
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 will represent an estimated $8.5 billion in forgone revenue in 2017. LIHTC encourages private-equity investment in low-income rental 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. Responsibilities of allocating agencies (in Section 42 of the Internal Revenue Code and regulations of the Department of the Treasury) encompass awarding credits, assessing the reasonableness of project costs, and monitoring projects.
In this testimony, GAO discusses (1) how allocating agencies implement federal requirements for awarding LIHTCs, assess reasonableness of property costs, and monitor properties' ongoing compliance; and (2) IRS oversight of the LIHTC program. This statement is based primarily on three reports GAO issued in July 2015 ( GAO-15-330 ), May 2016 ( GAO-16-360 ), and February 2017 ( GAO-17-285R ). GAO also updated the status of recommendations made in these reports by reviewing new or revised IRS policies, procedures, and reports and interviewing IRS officials.

What GAO Found

In its May 2016 report on the Low-Income Housing Tax Credit (LIHTC) program of the Internal Revenue Service (IRS), GAO found that state and local housing finance agencies (allocating agencies) implemented requirements for allocating credits, reviewing costs, and monitoring projects in varying ways. Moreover, some allocating agencies' day-to-day practices to administer LIHTCs also raised concerns. For example,
qualified allocation plans (developed by 58 allocating agencies) that GAO analyzed did not always mention all selection criteria and preferences that Section 42 of the Internal Revenue Code requires; and
allocating agencies could increase (boost) the eligible basis used to determine allocation amounts for certain buildings if needed for financial feasibility. However, they were 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 its 2015 and 2016 reports, GAO found IRS oversight of the LIHTC program was minimal. Additionally, IRS collected little data on or performed limited analysis of compliance in the program. Specifically, GAO found that
Since 1986, IRS conducted seven audits of the 58 allocating agencies we reviewed. Reasons for the minimal oversight may include LIHTC being viewed as a peripheral program in IRS in terms of its mission and priorities for resources and staffing.
IRS had not reviewed the criteria allocating agencies used to award discretionary basis “boosts,” which raised concerns about oversubsidizing projects (and reducing the number of projects funded).
IRS guidance to allocating agencies on reporting noncompliance was conflicting. As a result, allocating agencies' reporting of property noncompliance was inconsistent.
IRS had not participated in and leveraged the work of the physical inspection initiative of the Rental Policy Working Group—established to better align the operations of federal rental assistance programs—to augment its databases with physical inspection data on LIHTC properties that the Department of Housing and Urban Development (HUD) maintains.
In its prior reports, GAO made a total of four recommendations to IRS. As of July 2017, IRS had implemented one recommendation to include relevant IRS staff in the working group. IRS has not implemented the remaining three recommendations, including improving the data quality of its LIHTC database, clarifying guidance to agencies on reporting noncompliance, and evaluating how the information HUD collects could be used for identifying noncompliance issues. In addition, because of the limited oversight of LIHTC, in its 2015 report GAO asked that Congress consider designating certain oversight responsibilities to HUD because the agency has experience working with allocating agencies and has processes in place to oversee the agencies. As of July 2017, Congress had not enacted legislation to give HUD an oversight role for LIHTC.