IRS Amends Low-Income Housing Credit Compliance-Monitoring Regulations

(Parker Tax Publishing March 2019)

The IRS issued final regulations that amend the compliance monitoring regulations for the low-income housing credit. The final regulations revise and clarify the requirement to conduct physical inspections and review low-income certifications and other documentation and will affect owners of low-income housing projects that claim the credit, the tenants in those low-income housing projects, and the state and local housing credit agencies that administer the credit. T.D. 9848.

Background

Code Sec. 42(m)(1) provides that the owners of an otherwise-qualifying building are not entitled to the low-income housing credit dollar amount that is allocated to the building unless, among other requirements, the allocation is pursuant to a qualified allocation plan (QAP). A QAP provides standards by which a state or local housing credit agency or its Authorized Delegate within the meaning of Reg. Sec. 1.42-5(f)(1) (Agency) is to make these allocations. A QAP also provides a procedure that an Agency must follow in monitoring for compliance with the provisions of Code Sec. 42. A plan fails to be a QAP unless, in addition to other requirements, it provides a procedure that the agency (or an agent or other private contractor of such agency) will follow in monitoring for noncompliance with the provisions of Code Sec. 42 and in notifying the IRS of such noncompliance which such agency becomes aware of and in monitoring for noncompliance with habitability standards through regular site visits. Reg. Sec. 1.42-5 (the compliance-monitoring regulations) describes some of the provisions that must be part of any QAP. As part of its compliance monitoring responsibilities, an Agency must perform physical inspections and low-income certification review.

The compliance-monitoring regulations specifically provide that, for each low-income housing project, an Agency must conduct on-site inspections of all buildings within its jurisdiction by the end of the second calendar year following the year the last building in the project is placed in service (the all-buildings requirement). Prior to the issuance of the temporary regulations, the regulations also provided that, for at least 20 percent of the project's low-income units (the 20-percent rule), the Agency must both inspect the units and review the low income certifications, the documentation supporting the certifications, and the rent records for the tenants in those same units (the same-units requirement).

Under the temporary regulations, the IRS may provide exceptions from, or alternative means of satisfying, the inspection provisions. Rev. Proc. 2016-15 provides that, in a low-income housing project, the minimum number of low-income units that must undergo physical inspection is the lesser of (1) 20 percent of the low-income units in the project, rounded up to the nearest whole number of units, or (2) the number of low-income units set forth in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart in the revenue procedure (the REAC numbers). Rev. Proc. 2016-15 also applies the same rule to determine the minimum number of units that must undergo low-income certification review.

The temporary regulations also provide that Agencies must continue to comply with the all-buildings requirement unless guidance provides otherwise. Rev. Proc. 2016-15 provides for such an exception. Under Rev. Proc. 2016-15, the all-buildings requirement does not apply to an Agency that uses the REAC protocol to satisfy the physical inspection requirement, because the IRS determined that the REAC protocol is an acceptable method for satisfying the applicable requirements.

The temporary regulations also decoupled the physical inspection and low-income certification review and ended the same-units requirement. Accordingly, an Agency is no longer required to conduct a physical inspection and low-income certification review of the same unit. Because the units no longer needed to be the same, an Agency may choose a different number of units for physical inspection and for low-income certification review, provided the Agency chooses at least the minimum number of low-income units. Further, an Agency may choose to conduct a physical inspection and low-income certification review at different times.

Final Regulations

The final regulations remove the rule that allows the minimum sample size to be the lesser of 20-percent of the total number of low-income units or the minimum unit sample size set forth in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart. Instead, under these final regulations, Agencies must inspect no fewer units than the number specified for projects of the relevant size as set forth in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart. The Treasury Department and the IRS have determined that the REAC numbers produce a statistically valid sampling of units, which establishes confidence in the compliance monitoring results for projects of varying size. The Treasury Department and the IRS have further determined that the REAC numbers reasonably balance burden on Agencies, tenants, and building owners with the need to adequately monitor habitability and compliance with the low-income housing credit income and gross-rent restrictions. Agencies, however, continue to have discretion to inspect and review more units as they see fit.

The final regulations provide that, under the all-buildings rule, if the randomly selected minimum number of low-income units to be inspected fails to include at least one unit in one or more buildings in a project, then an Agency may satisfy the requirement by inspecting some aspect of each omitted building. These aspects might include the building exterior, common area, HVAC system, etc. In the absence of HUD oversight, the IRS said, requiring that all-buildings be inspected serves as a quality control mechanism.

The final regulations shorten the reasonable notice requirement to a 15-day notice that a project will experience an upcoming physical inspection or review of low-income certification. The IRS said it believes that the 15-day notice period gives building owners reasonable notice that a review of low-income certifications will occur and gives building owners and tenants reasonable notice that a project will be inspected and that low-income units will be inspected if they are in the random sample that will later be selected.

The final regulations clarify that an Agency may notify the owner of the particular low-income units for inspection only on the day of inspection. The IRS noted that, under the REAC protocol, HUD or HUD-certified REAC inspectors randomly select low-income units for inspection on the day of inspection.

The IRS said it was aware that additional time may be needed for Agencies' QAPs to be amended. Thus, the final regulations allow Agencies a reasonable period of time to amend their QAPs, but QAPs must be amended no later than December 31, 2020.

For a discussion of the low-income housing credit, see Parker Tax ¶105,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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