IRS Faulted for Lax Housing Tax Credit Oversight

Source: AccountingWEB

July 26, 2016

By Terry Sheridan

As the growing lack of affordable housing gets more attention, a recent report by the US Government Accountability Office (GAO) finds that IRS oversight of the low-income housing tax credit program continues to be “minimal.” 

The program encourages development of low-income housing through tax credits, which are allocated and awarded by state or local housing finance agencies under Section 42 of the tax code and Treasury regulations. The IRS administers the program with the allocating agencies.

In a 2015 report, the GAO indicated a similar finding and recommended co-administration of the program with the US Department of Housing and Urban Development (HUD).

For this year’s review, the GAO analyzed 58 allocation plans, including all of the states and District of Columbia, US territories, New York City and Chicago; Government auditors visited sites and reviewed files of nine allocating agencies, and interviewed IRS and HUD officials.

The GAO notes that its report “is a public version of a sensitive report” issued in May “and does not include details that IRS deemed tax law enforcement sensitive.”

The GAO found that while the allocating agencies “generally have processes to meet requirements for allocating credits, reviewing costs, and monitoring projects,” there are concerns. The GAO added that action is still warranted to address last year’s recommendation. 

Here’s a snapshot of the findings:

  • More than half of the allocation plans developed by the 58 agencies didn’t specifically describe the selection criteria and preferences that Section 42 requires.
  • Allocating agencies notified local governments about project proposals, as they are required to, but some required letters of support from the governments. HUD has flagged this practice as a fair housing issue, saying that the letters or other forms of local support could have a discriminatory influence on where the housing is located.
  • Allocating agencies have the discretion to increase the eligible basis used to determine their allocation amounts for certain projects. But they aren’t required to justify the increases. How increased awards (called “boosts”) are determined varies.
  • The IRS allows the allocating agencies discretion in reporting noncompliance information and hasn’t provided feedback about what the agencies are providing. As a result allocating agencies have been inconsistent in reporting noncompliance issues to the IRS.
  • The IRS hasn’t used the allocating agencies’ information to determine noncompliance trends. According to the GAO, the IRS has recorded about 2 percent of the noncompliance information it’s received since 2009.
  • The IRS has missed opportunities to audit low-income housing tax credit programs because it hasn’t used key information to decide whether to do an audit.
  • The IRS was unaware of HUD’s housing database and that low-income housing tax credit data also is analyzed through a HUD Rental Policy Working Group. The IRS isn’t involved in the working group, but participation would better reveal the amount of noncompliance and whether to begin audits, the report states. 

The GAO report recommends that the IRS should clarify when the allocating agencies must report noncompliance issues and also should participate in the HUD working group to strengthen its oversight.

John Dalrymple, IRS deputy commissioner for services and enforcement, agreed and disagreed with the GAO’s recommendations.

The IRS agrees that improved noncompliance reporting and data collection are necessary, but “significant resource constraints” have prevented that, he wrote. Still, the agency is working to acquire an updated server and programs to analyze the data.

The agency also agrees that “it may be helpful” to receive more consistent information on noncompliance and will determine ways to clarify when the allocating agencies should report noncompliance, building disposition, and other information.

On the other hand, Dalrymple wrote that HUD’s working group was established by the White House to address fair housing issues and can’t address tax matters. Because of a limited staff, the IRS must determine if participating in the group warrants the resources that would be required.

Limited staff also affects the IRS’s ability to evaluate and use HUD’s real-estate data, he wrote. And that data is limited because it does not include information from all states and also includes information about properties that aren’t in the tax credit program.

However, the IRS will determine if it could use the database to improve oversight of the tax credit program, Dalrymple wrote.