LIHTC developers must follow strict affordability rules—and fulfill other promises—for at least 30 years. While industry insiders insist compliance rates are high, tenant advocates say noncompliance is a real problem.
Photo by iStock user Warchi
Published: November 15, 2023
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The Low-Income Housing Tax Credit (LIHTC) program awards billions in tax credits each year to private market investors and developers who promise to build or preserve affordable housing. But the program is notoriously complex. Who enforces its rules? Why is it so dominant in the housing sector? What's the current state of efforts to reform it?
The nation’s largest and most important mechanism for funding affordable housing, the Low-Income Housing Tax Credit (LIHTC, pronounced “lie-tech”) program, awards billions in tax credits each year to private market investors and developers who promise to build or preserve affordable housing. In exchange for receiving the tax credits, developments must be run according to rules about income eligibility and rent levels, as well as LIHTC-specific fair housing and tenant protection rules. These rules remain in effect for at least 30 years. Developers also make a range of development-specific promises regarding where and how the building will be constructed and how it will be managed.
Though industry experts largely agree that compliance rates among LIHTC developments are high, verifying that statement is difficult for several reasons. For one, monitoring relies heavily on developers’ self-reporting. (State housing agencies, which often don’t have the funding or staff to inspect properties and vet paperwork thoroughly or regularly, are also statutorily required to monitor program compliance.) Second, the consequences for noncompliance mostly disappear after 15 years. Finally, there isn’t publicly available data about properties that are not compiling with program rules, nor is there consistent or reliable data about the consequences they face.
So, given those gaps, what can we know about how enforcement of LIHTC program requirements work, what data is available for the public’s review, where do enforcement gaps exist, and what methods can be used to strengthen compliance enforcement?
Because it’s a tax credit, LIHTC is a program of the Internal Revenue Service (IRS). However, the tax credits are awarded through state housing finance agencies (HFAs), which create their own application processes. In exchange for receiving these tax credits for a particular property, developers and investors agree to three sets of things:
State HFAs are responsible for monitoring compliance with all rules and regulations and reporting back to the IRS.
Once a development is built and all the apartments are rented, the HFA certifies to the IRS that the development has met all construction and affordability provisions for its initial residents. This gives the IRS the go-ahead to issue the first year’s tax credits. After the initial approval, developers self-certify to the state every year that they’re continuing to meet the LIHTC program’s obligations. HFAs must conduct site inspections at least once every three years, but they only have to check 20 percent of affordable units for health and safety issues or building code violations. They also often rely on “desk audits,” which the IRS defines as when HFAs analyze “information submitted to their office rather than inspecting the documents at the property site.”
HFAs report noncompliance to the IRS. For the first 15 years after the building is leased up, developers who don’t fulfill their promises can have those already-awarded tax credits recaptured by the IRS (and may also have future credit claims denied).
There’s no easy way for the public to find out which LIHTC developers follow the rules and which have been cited for noncompliance, if they were punished, or how much, if anything, they had to repay. Carefully worded public records requests to a state HFA can turn up whether that HFA has reported any noncompliance regarding a specific developer or owner to the IRS, says Marcos Segura, a staff attorney at the National Housing Law Project (NHLP).
But not all violations get caught. “There’s not really a sense that the Treasury Department or the IRS has given housing finance agencies the sense that they have any responsibility to do more than” conduct the periodic inspections and collect self-certifications, says Philip Tegeler, director of the Poverty and Race Research Action Council (PRRAC). With little IRS direction, HFAs tend to report tax code–required violations, but little more.
And not all the problems that are caught are reported to the IRS. Noncompliant developers typically get at least 30 days to correct any issues, and the remediation period can usually be extended for up to 6 months. “They get a long time to address the issue and multiple opportunities to do that,” Segura says. “So, typically the issue is corrected by the time it gets to the IRS. I have never heard of any tax credit investor or project being subject to [tax] credit recapture.”
Even the LIHTC compliance professionals at Novogradac Consulting LLP, a tax consulting firm that works extensively with LIHTC developers, remind developers there’s no need to panic. “Most state agencies are quite understanding,” the company’s website reads. “They know mistakes happen and they want us to do what we’ve set out to do, which is to provide affordable housing for qualified households.”
Even when the HFA does report violations, those records don’t reveal whether the IRS took any action on those reports. Once it leaves the HFAs it enters a “sort of a mystery box,” says James Tassos, deputy director of tax policy and strategic initiatives for the National Council of State Housing Agencies (NCSHA), a national nonprofit that represents state HFAs. “It’s taxpayer information, so once it goes to the IRS, whether or not they recapture credits on the deal is something between the IRS and the taxpayer.” In theory though, he adds, “you could make assumptions based on the developers’ continuing ability to develop [LIHTC-funded properties] in their state.”
The IRS didn’t reply to repeated requests for information or comment by publication time.
Despite these significant gaps in data collection and reporting, most affordable housing industry insiders say developer compliance, at least with the income and rent rules, isn’t an issue.
“When you look over the history of compliance, the Low-Income Housing Tax Credit has a far more exemplary compliance record than any previous federal housing finance program,” says Peter Lawrence, director of public policy and government relations at Novogradac.
The threat of IRS tax recapture seems to keep developers in line during the first 15 years after a LIHTC building is placed into service, at least regarding the standards the IRS cares about. Tax recapture consequences have the potential to financially devastate a LIHTC property owner since they can retroactively apply to the entire tax credit allocation. “Let’s say in year 7 IRS finds noncompliance in year 3, they can go back and say we’re taking the tax credits from year 3 away from you,” Lawrence says. “That recapture is a very powerful tool, because investors don’t want that to happen, ever.”
After year 15, Lawrence asserts, the desire to stay in HFAs’ good graces and secure future tax credits is enough to ensure continued compliance. Repeat offenders could have applications for future LIHTC developments denied. “That’s an extraordinarily powerful incentive, because developers have a pipeline of projects,” Lawrence says. And LIHTC competition is cutthroat: Only about 25 percent of developers who apply for the competitive 9 percent credits receive an allocation, making them even more careful to look good by following all the rules, according to Tassos. (This incentive would presumably carry less weight for those only using 4 percent credits, which are not competitively allocated.)
“The developers that are in the program, what they really want more than anything is another deal, another opportunity to get credits,” Tassos says. “If they don’t have the ability to do that, that’s significantly hurting their business, so they have a real incentive to keep these projects in compliance so they can get future credit allocations.”
Mark Shelburne, a housing policy consultant at Novogradac, says, “getting [denied] in one state [for noncompliance reasons] means you’re probably going to get bounced out of [developing LIHTC projects] in other states,” so staying in HFAs’ good graces is “really consequential.”
When asked about this internal watchdog theory, Erin Boggs—executive director of Open Communities Alliance, a Connecticut-based nonprofit focused on ending residential segregation—conceded it could be true if developers tattle on one another. But, she points out that “if no checking is happening along the way, then there’s nothing to look back on and say there’s a problem when renewal happens. I think you have to do some monitoring before that could be meaningful.”
The Government Accountability Office in 2016 and 2018 reported issues with LIHTC data collection and reporting, fraud detection, and risk management. In 2022, the Treasury itself reported that “approximately 67,000 LIHTC claims for Tax Years 2015 through 2019 totaling almost $15.6 billion lacked or did not match supporting documentation due to potential reporting errors or noncompliance.” However, in the same report, the department noted that when it did look closely at returns, the rate of actual errors was far lower than for “similar returns.”
A glaring gap in LIHTC enforcement appears in years 15 to 30 (or beyond in places with longer requirements). During this time, known as the extended use period, the same rules apply as during the first 15 years, but the tax credits can no longer be recaptured. “After the 15 years is over, then even the federal rules don’t have a federal consequence,” Shelburne says. “The IRS has no authority to do anything after that point. It’s just between the owners and the state and the tenants.”
“The big enchilada, so to speak—the most valuable thing—are those tax credits,” Segura says. “Once that 15-year compliance period ends, there’s no longer any tax-related incentives for owners to continue complying with program requirements.”
And if the IRS isn’t going to do anything about it, HFAs might stop bothering to track it. Dan Pontious, housing policy coordinator for the Baltimore Metropolitan Council, is part of a task force that created a database that tracks LIHTC properties in an attempt to preserve their affordability. The monitoring by the state HFA, the Maryland Department of Housing and Community Development (DHCD), is “pretty robust” in the first 15 years, he found, perhaps in part because “the IRS is keeping an eye on them, as well.”
However, says Pontious, the only properties he could get demographic data on were still in their first 15 years. After that, the record-keeping just falls away.
Multiple requests for comment to DHCD were not returned before publication.
The IRS at least seems to care about compliance with income and eligibility rules for the first 15 years. The other two categories—fair housing and tenant protections, and project-specific parts of the regulatory agreements—get little attention even during the compliance period.
By law, LIHTC property owners must follow federal fair housing laws and can’t discriminate against Section 8 voucher holders. They are also technically bound by IRS guidelines to follow good cause eviction protections, though the definition of “good cause” is left up to states and localities, which may define it extremely broadly, or may even not define it at all.
But HFAs, tenant advocates, and renters have no way to report alleged violations of these requirements. “There’s no procedure in place at IRS or Treasury or at the state level for filing complaints regarding noncompliance with the LIHTC nondiscrimination provisions,” PRRAC’s Tegeler says. “There is no place to check if you’ve been discriminated against on the basis of your Housing Choice Voucher and there’s no other way of pursuing a complaint against the development with [your] state.”
The form HFAs use to report noncompliance to the IRS doesn’t include a method for reporting developers who violate the nondiscrimination clause. And “if it’s not considered a reportable item by the IRS, the state really doesn’t seem to pay attention to it,” says Barbara Samuels, former managing attorney of the housing program at the American Civil Liberties Union of Maryland.
HFA monitoring in Maryland “is not really that intensive after the first three years or so,” Samuels says. She also found that “what they were really looking for in monitoring was, from a tenant perspective, minor, technical things.” For example, “they did not seem to be monitoring to see whether or not the landlords, the owners, were complying with the nondiscrimination requirements of LIHTC. They weren’t really tracking to what extent the developments were accepting vouchers.”
Ensuring LIHTC developer compliance with fair housing laws “has forever been, from the fair housing advocate perspective, an area of concern,” Boggs says. She suspects that landlord discrimination in LIHTC properties, especially in the extended use period, is “a real problem,” but says she’s “not aware of any concerted effort on the part of the IRS to double check that nothing bad is happening in terms of discrimination.”
Written into the federal statute that created the tax credit is a requirement that each HFA create a state-specific Qualified Allocation Plan (QAP) that defines developer eligibility criteria and establishes a scoring system used to award the competitive 9 percent LIHTC credits.
To win more “points” in the competition for tax credits, developers make substantial promises to their HFA. Many of these promises are delivered upon completion of the project and can be verified before the initial tax credits are approved—things like providing electric vehicle-ready parking or rehabilitating a historic building, for example.
But not all QAP promises are that easily trackable or enforceable. Ongoing operational promises, such as provision of residential services or multiyear lease-purchase arrangements, can go unverified by overworked HFAs. Additionally, those promises are not what the IRS is looking for.
Pontious says he’s spoken with nonprofit affordable housing developers who worry that for-profit developers in the LIHTC space get competitive points for committing to services on the state’s QAP, earning them preference over other developers, without intention to follow through. In those cases, it’s up to the HFA to hold the developer accountable. “But the state did not have a robust way of making sure that happened,” Pontious says. “The concern was that the state was not holding them accountable and not holding it against them the next time they [applied] for a tax credit.”
It’s not just in Maryland. While working as part of a team researching whether LIHTC developments in Connecticut were fulfilling state-mandated community revitalization plans, Boggs learned that the IRS doesn’t pay attention to state-level LIHTC agreements.
“We basically found they were meaningless,” Boggs says. “The IRS is not doing anything about that. They’re not overseeing it. They’re not checking it.”
So how could this be done better? First, fund better monitoring of compliance with all the rules. “I would imagine that throughout the system, just like with every system, we have probably not funded enough roles to enforce compliance,” says Carolina K. Reid, a faculty research adviser at the UC Berkeley Terner Center for Housing Innovation. “And I think that’s particularly true as we see more private developers operating in the LIHTC space.”
Second, add more consequences and give them teeth—at both the federal and state levels. “Because the IRS can no longer recapture credits after year 15, some people believe that the IRS no longer has authority to enforce program rules [in years 15 to 30]. That is not the case,” according to Segura. The LIHTC legislation contains a provision that allows for “such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations . . . preventing the avoidance of rules in this section.”
In other words, the IRS has the legal authority to create an enforcement regime during the extended use period, which could include levying fines, penalties, assessments, etc. “Of course, this would require the IRS to promulgate regulations setting out enforcement actions and the mechanism effecting said actions,” Segura wrote in an email. And “it hasn’t done so. Thus, as a practical matter . . . post-year 15 monitoring falls to state housing agencies.”
State HFAs can also use tools like fines and penalties to make LIHTC rules in the extended use period more enforceable. And some do. California, for example, in 2016 authorized its state tax allocation agency to levy fines against developers for uncorrected violations of state tax credit policy during the extended use period.
Given the lack of enforcement and monitoring by the IRS and in many instances by the state housing agencies, sometimes tenants have no recourse but to sue.
They could also increase their own reporting requirements. Some states, like Maryland, reiterate HUD rules and “zhuzh them up a little” in the QAP, Samuels says. But they could, for example, “require reporting of how many voucher holders they had or what percentage.” That, she notes, could raise “red flags that [the HFA] could then use to go more in depth.”
A fee schedule or other punitive measures for noncompliance can also be written into the property’s regulatory agreement, which outlines the building owner’s obligations to the HFA. Regulatory agreements (also called operational agreements) are binding contracts between the HFA and the developer that are created when construction on a LIHTC building is complete and placed in service.
Given that currently IRS involvement ends after year 15, if no enforcement provisions have been written into state law or the regulatory agreement, sometimes the only enforcement recourse is for HFAs and tenants to sue developers who flout LIHTC rules. “Obviously that’s a difficult remedy to pursue,” Shelburne says, “but if something were bad enough then it might be worth a try.”
NHLP wants to change how difficult it is. As federal law is currently written, tenants have the legal right to sue their LIHTC landlords during the extended use period, but only under the good-cause eviction protections and the rent restrictions provisions. NHLP is pushing state HFAs to include within all LIHTC operational agreements a legal right for residents to sue over any developer noncompliance. In August, NHLP submitted comments to the NCSHA, stating that “these private enforcement rights are an imperative,” and recommending the organization add the right of private enforcement to its 2023 Recommended Practices Guide for state HFAs.
“We’re asking the state housing agencies to take that step and say, ‘Hey, listen, every single obligation in this contract is not just for the benefit of the state housing agency; it’s for the benefit of the tenants,’” Segura says. “And, given the lack of enforcement and monitoring by the IRS—and in many instances by the state housing agencies—sometimes tenants have no recourse but to sue.”
Shelby R. King is Shelterforce's investigative reporter. She began her reporting career in 2010 covering cops/public safety and has been writing about housing and community development since 2014.
