What LIHTC Project Owners Should Know About New IRS Compliance-Monitoring Rules

Editor: Mary Van Leuven, J.D., LL.M.

The IRS recently published regulations and a revenue procedure revising the compliance-monitoring duties of state or local housing credit agencies in connection with low-income housing tax credit (LIHTC) projects. The changes, which are summarized below, provide agencies with additional flexibility in implementing their monitoring duties.

20% Rule

Currently, state housing agencies must conduct an initial on-site inspection of all buildings in a project by the end of the second calendar year following the year the last building in the project is placed in service, and for at least 20% of the project’s low-income units (the 20% rule), they must inspect the units and review the low-income certifications, the documentation supporting the certifications, and the rent records for the tenants in those units. These same procedures must be performed at least once every three years over the 15-year compliance period.

Rev. Proc. 2016-15 modifies the 20% rule. Under the new rules, the minimum number of low-income units that must undergo physical inspection and certification review is the lesser of:

• 20% of the low-income units in the project, rounded up to the nearest whole number of units, or
• The number of low-income units as provided in the low-income housing credit minimum unit sample size reference chart in the revenue procedure.

For projects with more than 110 units, the number of required physical inspections and certification reviews is less than 20%.

The IRS has indicated that when a project contains relatively few units, it is concerned that the 20% rule will not produce a sufficiently accurate estimate of the remaining units’ overall compliance with habitability or low-income requirements. Consequently, the IRS will continue to review this issue and may provide further guidance not allowing the 20% rule in those situations.

Decoupling of On-Site Inspection and Low-Income Certification Review

Also under the new rules described in Rev. Proc. 2016-15, agencies are no longer required to select the same low-income units for on-site inspections and low-income certification review. If the agency chooses to select different low-income units for on-site inspections and for low-income certification review, it must select the units for each purpose separately and randomly. An agency may choose a different number of units for on-site inspections and low-income certification review, provided it chooses at least the minimum number of low-income units in each case.

Further, because the units no longer need to be the same, an agency may choose to conduct physical inspections and low-income certification reviews at different times. For example, if the Department of Housing and Urban Development (HUD) requires a physical inspection only two years after a joint HUD/LIHTC inspection, that second inspection may be used for both HUD and LIHTC purposes without accelerating the next LIHTC file review. (Thereafter, physical inspections performed every third year might take place one year before the every-three-year file reviews.) Also, an agency may choose to conduct physical inspections in the summer but complete the low-income certification review in the winter, when conducting physical inspections may be difficult due to weather conditions.

Physical Inspections

The new rules have added the physical inspection protocol established by the HUD Real Estate Assessment Center (the REAC protocol) as an option to satisfy the physical inspection requirements. The availability of the REAC protocol should promote flexibility and eliminate the need for multiple federal inspections on the same property if that property also benefits from HUD programs. The revenue procedure treats an inspection as being performed under the REAC protocol only if it satisfies all of the following requirements:

1. Both vacant and occupied low-income units in a low-income housing project are included in the population of units from which units are selected for inspection.
2. The inspection complies with the REAC protocol, including the requirement to use the most recent REAC Uniform Physical Condition Standards inspection software (or software that is accepted by HUD).
3. The inspection is performed by HUD REAC inspectors (or inspectors certified by HUD).
4. The inspection results are sent to HUD, where they are reviewed and scored within HUD’s secure system without any involvement of the inspector who conducted the inspection, and HUD makes its inspection report available.

Rev. Proc. 2016-15 also provides an exception from the general requirement that all buildings in a project are subject to on-site inspection when the REAC protocol is used.

EditorNotes

Mary Van Leuven is a director, Washington National Tax, at KPMG LLP in Washington.

For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or mvanleuven@kpmg.com.

Unless otherwise noted, contributors are members of or associated with KPMG LLP.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. ©2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.