GAO Recommends HUD as LIHTC Program’s Joint Administrator

The Government Accountability Office (GAO) recently issued the second of three reports on the Low-Income Housing Tax Credit program entitled, “Low Income Housing Tax Credit: Some Agencies’ Practices Raise Concerns and IRS Could Improve Noncompliance Reporting and Data Collection.” 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 report found the IRS oversight of the LIHTC program has been minimal. Specifically, since 1986 the IRS conducted seven audits of 56 state housing finance agencies (HFA) on which the IRS relies to administer and oversee the LIHTC program. It found that oversight of HFAs has been minimal, partly because LIHTC is viewed as a peripheral program in the IRS in terms of its mission and priorities for resources and staffing. Without such reviews, it concluded that the IRS cannot determine the extent of noncompliance and other issues at HFAs.

The report also notes that the 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 the 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 the GAO that staff routinely conduct site visits and other project reviews. In these cases, the IRS also is able to benefit from the other federal agencies’ policy and subject-matter expertise. Likewise, the report finds that HUD experience in administering affordable housing programs and working with HFAs may benefit the 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 the report notes that the 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.

The report finds that the IRS is not well positioned to oversee LIHTC. Since 1990, the IRS has been on the GAO’s high-risk list due to significant capacity challenges and incomplete monitoring of tax law enforcement. The IRS’s budget has been reduced by 10 percent and enforcement program performance and staffing levels have declined since 2010.

The report says joint administration with HUD could better align program responsibilities with each agency’s mission and more efficiently address existing oversight challenges. Under joint administration, the IRS could retain responsibilities consistent with its mission (as it does in the other two tax credit programs). For example, the 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, the 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.