Treasury Report Finds IRS's LIHTC Program Oversight Can Be Improved
The Treasury Inspector General for Tax Administration (TIGTA) recently released a report on IRS oversight of the LIHTC program. The previous Chairman of the Senate Budget Committee, Michael Enzi (R-WY), requested the audit to obtain information about the LIHTC program as part of the committee’s evaluation of the economy, efficiency, and effectiveness of federal housing assistance programs. The audit assessed IRS processes and procedures to ensure that state housing credit agencies (HCAs) and site owners comply with LIHTC program provisions.
The report raises concerns with data reliability, reconciliation discrepancies, and missing first-year elections that increase the risk of undetected errors and noncompliance. TIGTA made seven recommendations for improvement, with which the IRS agreed on five. We'll go over the recommendations and the IRS's response.
The report found much to criticize with the IRS's oversight of the LIHTC program. According to the report, the audit found approximately 67,000 LIHTC claims totaling almost $15.6 billion that lacked or did not match supporting documents. TIGTA made the following seven recommendations.
Implement effective system checks. In response to a 2015 Government Accountability Office recommendation, the LIHTC Unit started transcription and review of submitted HCA and building owner forms using a new database in September 2017. However, when the office conducted a review of HCA-submitted forms and schedules, it found data errors, unreliable inventory control, and processing delays that increase the risk for lost forms, untimely action, and undetected errors or noncompliance that may affect the IRS’s ability to provide adequate oversight of the LIHTC program.
Establish quality review systems for forms processing. The audit found that the LIHTC Unit manager evaluates work for individual employee performance reviews, but an overall review of the number and types of errors made while processing forms is not conducted. A quality review system for forms received from HCAs and owners would also identify patterns of submission errors and areas in need of quality improvement.
Set examination process for owners submitting questionable Forms 8609-A. A valid LIHTC claim amount should trace back to a building owner-submitted Form 8609-A that’s supported by an HCA/building owner-submitted Form 8609. Form 8609-A is submitted with the building owner’s tax return to report annual compliance with LIHTC provisions (Part I) and calculate the specific tax year LIHTC allocation amount for a building (Part II). Although the LIHTC is claimed over a 10-year period, Form 8609-A is required to be filed for the 15-year compliance period, with just Part I completed for compliance information for the final five years.
The auditors compared Forms 8609 (awarded credits submitted to LIHTC Unit) with Forms 8609-A (claimed credits submitted on building owner’s return) to identify 4,283 Forms 8609 submitted for tax years 2014 through 2018 that didn’t have a corresponding Form 8609-A. In some instances, there was a taxpayer ID number or building identification number mismatch between Form 8609 and Form 8609-A, but in other instances, there was no Form 8609-A attached to the building owner’s return. If there was no corresponding Form 8609-A, a building could’ve been sold and the new building owner hasn’t been identified.
Revise Forms 3800, 8586, 8609-A to remove current-year LIHTC claim option for pre-2008 building. Auditors found that a significant number of the low-income housing tax credits appeared to be claimed beyond the allowed 10-year period. When auditors reviewed e-filed Forms 3800, they found approximately 20,200 questionable LIHTC claims for tax years 2018 and 2019 totaling $491.5 million for buildings placed in service before calendar year 2008. These LIHTC claims are questionable because the 10-year credit period has expired.
Typically, Form 8609-A is required to be filed for the 15-year compliance period. If applicable, each Form 8609-A amount is combined with the LIHTCs from other building allocations on Form 8586, Low-Income Housing Credit. And if the building owner is also the taxpayer claiming the LIHTC (that is, a corporation or individual), Form 8586 information is entered on Form 3800, General Business Credit, to claim the credit. If the building owner is a pass-through entity such as a partnership, S-corporation, or estate/trust, Form 8586 information is distributed using Schedule K-1 for the recipients (that is, partner, shareholder, beneficiary, other pass-through entity) to record the LIHTC and include on their tax return, if applicable.
Establish process to examine questionable Forms 3800 that don’t correspond to supporting forms. Auditors found that significant numbers of LIHTC claims weren’t supported by return information. They were unable to reconcile all taxpayer LIHTC claims back to LIHTC allocations, but were able to check if current year claims (not carryforward or carryback claims) had support from a Form 8609-A or a pass-through Schedule K-1. Most questionable claims as identified by the auditors involved taxpayer returns that indicated the LIHTC came from a pass-through entity, but no supporting documentation could be found in IRS databases.
Develop action plan to identify possible causes and correct reporting errors on LIHTC documents. The auditors acknowledged that the IRS has some processes to address reporting errors. But the report identified approximately 67,000 e-filed LIHTC claims totaling almost $15.6 billion that lacked or didn’t match support from Form 8609-A or a pass-through Schedule K-1.
Allocate additional resources to allow for more HCA compliance monitoring reviews. The IRS has provided the HCAs with guidance, presentations, online reference materials, and a designated email box for questions. In addition, the IRS conducts reviews of LIHTC allocation practices and compliance monitoring processes of the HCAs. However, the report finds that few HCA reviews were conducted because only one analyst is currently assigned to this program. The report also notes that only eight of 56 HCAs have been reviewed in the past 19 years.
The IRS agreed with five of the seven recommendations. The first three recommendations called for improving the reliability of the LIHTC database. The IRS agreed with these recommendations. The IRS stated that a system change request was submitted to enhance data input validity checks for Form 8609. The IRS also said that additional training will be conducted for forms processing and that it will develop a process to compare Forms 8609-A with Forms 8609. However, IRS management did not agree to ensure that the additional validity checks for other forms will be implemented due to budget constraints, competing priorities, and resource allocations.
With regard to removing the option to make a current-year LIHTC claim for a pre-2008 building for the identified forms, the IRS agreed with this recommendation. IRS management stated that changes will be initiated for Form 3800, Form 8586, and Form 8609-A to eliminate current-year LIHTC claims for pre-2008 buildings. The IRS also said that data will be reviewed to make recommendations for a selection process to compare LIHTC claims on Forms 3800 with Forms 8609-A and Schedules K-1.
In response to the recommendation to develop an action plan to identify possible causes and correct reporting errors on LIHTC documents, the IRS stood by its existing processes. It said that reporting errors on LIHTC documents are corrected through existing processes and provided examples of errors addressed by the LIHTC Unit while processing HCA- and owner-submitted LIHTC documents.
The IRS also disagreed with allocating additional resources for increased HCA compliance monitoring reviews. The IRS stated that it recognizes an oversight responsibility to review the credit allocation practices and compliance monitoring processes. However, it doesn’t plan to commit additional resources to HCA compliance monitoring reviews due to competing resource needs.
First-Year Elections Not Always Made
on Owner-Submitted Form 8609
Owners can expect increased IRS scrutiny of IRS Form 8609. LIHTC site owners submit this form to obtain a housing credit allocation from the housing credit agency and to certify certain information. In its response to the recommendations of the Treasury Inspector General for Tax Administration's report, the IRS placed an emphasis on making changes to the processing of Form 8609. The IRS said that it would provide additional training for forms processing and would develop a process to compare Forms 8609-A with Forms 8609.
Owners are required to make certain first-year irrevocable elections for treatment of the LIHTC on Form 8609, Part II. In addition, a “no” or “not applicable” response is not an option for some elections. The TIGTA obtained data extracts of 44,831 HCA- and 68,178 building owner-submitted Forms 8609 entered into the new database system as of March 10, 2020. Here are the first-year elections the TIGTA report found that were not always made on owner-submitted Forms 8609:
Election to treat building as multiple building project (Line 8b): 59,867 records checked “yes”; 4,217 records checked “no”; and 4,094 records with nothing checked.
If box 6a or box 6d is checked for a newly constructed building, an election should be made to reduce eligible basis (Line 9a): 177 records checked “yes”; 15,275 records checked “no”; 20,239 records did not answer; and 11,837 records answered when not required.
Election to reduce eligible basis by disproportionate cost (Line 9b): 1,016 records checked “yes”; 6,271 records checked “no”; and 60,891 records with nothing checked.
Election to begin credit period the year after placed-in-service date (Line 10a): 16,172 records checked “yes”; 30,954 records checked “no”; and 21,052 records with nothing checked.
Election not to treat large partnership as taxpayer (Line 10b): 872 records checked “yes” and 67,306 records with nothing checked, possibly due to “no” not being an option on the form.
Election for minimum set-aside requirement (Line 10c): 396 records checked “20-50”; 66,456 records checked “40-60”; 888 records checked “25-60”; 201 records checked “Average Income”; and 237 records with nothing checked.
Election for deep-rent-skewed project (Line 10d): 81 records checked “15-40” and 68,097 records with nothing checked, possibly due to “no” not being an option on the form.
Important Compliance Information to Obtain
from IRS Form 8609
Here are three critical pieces of information tax credit managers can find on Form 8609 to help manage a site successfully.
Placed-in-service date. This is the date from which a site must start complying with IRS and state housing credit agency regulations. Each building has its own placed-in-service date. So different buildings on the same site may have different placed-in-service dates. It's also the date that starts the clock for record-keeping purposes. The placed-in-service date appears in Line 5a in the section the state housing agency completes.
Minimum set-aside requirement. To participate in the tax credit program, each site must have at least one minimum set-aside. That’s the minimum percentage of units that must be rented to qualified low-income households. If you don’t meet the set-aside on time, the IRS can recapture the owner’s credits for the entire site going back to the first year the site was placed in service.
You can find this information on line 10c. The form directs the owner to check a box to elect a minimum set-aside requirement. The choices are 20-50, 40-60, Average Income, or (in New York City only) 25-60. Beside the average income option, the first number in the pair (e.g., the 20 in 20-50) indicates percentage of residential units in the site that must be leased to qualified low-income households at restricted rents. The second number in the pair (e.g., the 50 in 20-50) is the maximum percentage of area median gross income that a household may earn to be eligible.
Deadline for meeting minimum set-aside. An owner can't begin to claim tax credits for a site until you rent up the units to meet the minimum set-aside. You can learn how much time you have to rent up the building to meet your minimum set-aside by looking at line 10a. This line asks whether the owner "elect[s] to begin credit period the first year after the building is placed in service." If the owner checked "no," then the compliance period began in the year the building was placed in service. But if the owner checked "yes," then the compliance period began the first year after the year the building was placed in service.