NCSHA Asks IRS to Rescind Final Compliance Monitoring Regulations

The National Council of State Housing Agencies (NCSHA) recently sent a letter to the IRS urging it to rescind the recently released final amended compliance monitoring regulations and to work with states to develop a “workable alternative.” The new compliance monitoring final regulations replace temporary regulations (Revenue Procedure 2016-15) that had been in place since 2016. Revenue Procedure 2016-15 required states to conduct physical inspections and low-income certification reviews for the lesser of 20 percent of the units in a project or the number of units provided by a minimum unit sample size reference chart.  

Prior to Revenue Procedure 2016-15, the IRS required states to monitor 20 percent of the units in all projects; however, this meant that states were monitoring an unnecessarily large number of units in larger properties. Thus, the IRS introduced the reference chart in Revenue Procedure 2016-15, which effectively provided monitoring relief for larger properties, while smaller properties were still subject to the 20 percent threshold.  

The new final rule eliminates the 20 percent threshold entirely and requires all properties to be monitored according to the sample requirements in the reference chart. For properties with between one and five units, states must now monitor 100 percent of the units, 80 percent of the units in a 10-unit property, 60 percent of the units in a 20-unit property, and 50 percent of the units in a 30-unit property.

The letter explains how the new compliance monitoring sample size requirements the IRS adopted in the final rule will greatly increase the number of units states must monitor, including both physical inspections and low-income certification reviews, thus creating significant increases in state agencies’ costs for additional staff and other related expenditures. Cost increases are likely to necessitate increased compliance monitoring fees and could force states to divert resources from other affordable housing priorities to fund LIHTC compliance monitoring activities. And, furthermore, increased fees may be passed on to tenants if the rents being charged are below the maximum allowable rents.

The letter also identifies rural areas as most affected by the new sample requirements. Rural areas have LIHTC sites that are typically smaller and may be spread further apart geographically. In Kentucky 93 percent of the LIHTC sites have 80 or fewer units. And North Dakota reports that the new rule will double its compliance burden, as approximately 90 percent of its properties have fewer than 50 units.

NCSHA also pointed out that the new sample size requirements are based on the sample sizes used by the Real Estate Assessment Center (REAC) protocol, which is used for physical inspections of Section 8 and other HUD properties. The letter explains why the REAC sample requirements shouldn’t be applied to the LIHTC. REAC inspectors perform physical inspections of properties, but don’t perform the low-income certification reviews that are a part of LIHTC compliance monitoring. IRS regulations require state agencies to conduct an equal number of low-income certification reviews and physical inspections of units.  

Tenant file reviews for low-income certification of households in properties that undergo REAC physical inspections are conducted by entities such as Performance-Based Contract Administrators (PBCA) as part of the Management and Occupancy Review (MOR) for each project. The Annual Contributions Contracts between HUD and PBCAs dictates the number of tenant files PBCAs must review. And that number is far less than what state LIHTC agencies must review under the new rule.

NCSHA also raised concerns about the change to the amount of advance notice that states give owners before site inspections, which the new rule reduced to 15 days from 30 days, and the new requirement that states use a random selection process, rather than a risk-based process, for determining which units they will inspect.

The letter urges the IRS to rescind the new sample size provision in the final rule and return to the prior practice of monitoring the lesser of 20 percent of units or the applicable sample in the reference chart. However, if the IRS still feels that the compliance requirements under Revenue Procedure 2016-15 are insufficient, the NCSHA urges it to consider alternative approaches that would reduce the burden on state agencies. The NCSHA offered the following options the IRS could consider:

• Working with state agencies, through NCSHA, to develop an evidence-based process for determining the appropriate unit sample size(s) applicable to Housing Credit compliance, and relying on the expertise of state agencies in the determination of when additional units must be monitored;
• Basing compliance monitoring sample requirements on the total number of units at a site with a common owner and plan of financing, regardless of the owner’s 8b election; and
• Allowing states to conduct fewer tenant file reviews than physical inspections.