The Government Accountability Office’s second of three reports on the Low-Income Housing Tax Credit program was released today and focuses on allocating agencies’ administration and oversight of the LIHTC program. The GAO found that the state agencies that allocate credits generally meet the program requirements, but there are a few ways in which the IRS could improve.

In the report, GAO recommends that IRS clarify when agencies should report noncompliance. GAO also suggests that IRS participate in the Rental Policy Working Group to assess the use of HUD’s database to strengthen IRS oversight. Through the Rental Policy Working Group, HUD collects and analyzes housing data, including LIHTC inspection results. According to the GAO report, the IRS was not previously aware of this data collection effort.

In the report, GAO identified three main concerns regarding this variance. First, about half of the QAPs they reviewed did not explicitly mention all selection criteria and preferences required by Section 42 of the Internal Revenue Code. Second, some agencies require letters of support from local governments for projects to receive tax credits. The GAO is concerned that this could have a discriminatory influence on the location of affordable housing and raise fair housing issues. Third, agencies do not need to justify boosts to eligible basis for a project. This means criteria for basis boosts vary across states.

The report made additional observations and conclusions:

  • IRS does not review state requirements for QAPs or the criteria they use to make credit awards. These requirements and criteria vary across states.
    • Most agencies did not explicitly cite all required preferences and selection criteria in QAPs
    • Agencies have flexibility on methods for evaluating applications and nearly all of them use points or a threshold system.
    • Agencies vary in how they handle nonprofit set-asides, extended use agreements, market studies, and written explanation to the general public.
  • Agencies have procedures to assess reasonableness of development costs, but the IRS is not well positioned to examine how agencies award credit boosts.
    • Agencies award amounts for projects differently and use various cost limits and benchmarks to determine reasonableness of costs.
    • Agencies have different processes to meet regulatory requirements for reviewing costs at application, allocation, and placed-in-service.
    • IRS does not review agencies’ criteria for awarding discretionary increases, which could result in over-subsidizing projects.
  • Agencies had processes to monitor compliance but IRS collects inconsistent information and uses little of it to assess extent of noncompliance program.
    • Selected agencies had processes to monitor properties’ compliance with program requirements.
    • Lack of clear guidelines of when to send IRS noncompliance information results in inconsistent reporting across allocating agencies.
    • IRS bases its review for audit potential on incomplete information
    • HUD expects to augment its databases with LIHTC information through its Rental Policy Working Group’s inspection alignment initiative, which will likely increase data collection. IRS has not been involved in or aware of this effort.

In preparing the report, the GAO reviewed Qualified Allocation Plans from each state, the District of Columbia, U.S. Territories, New York City, and Chicago. They performed site visits and file reviews at nine allocating agencies. The GAO also interviewed IRS and HUD officials.

The first of GAO’s three reports on LIHTC was released last July and recommended joint administration of the LIHTC program by HUD and the IRS. The GAO’s review of the LIHTC program was requested by Senator Chuck Grassley, who serves as Chairman of the Senate Judiciary Committee. Congress received a restricted version of the latest report on May 11.