IRS Issues Housing Credit Compliance Monitoring Regulations
On February 23, the Internal Revenue Service (IRS) issued regulations amending the Low Income Housing Tax Credit (Housing Credit) compliance monitoring requirements to revise and clarify physical inspection and certification review rules. In conjunction with the new regulations, IRS published Revenue Procedure 2016-15, which further explains the implementation of the new regulations. The compliance monitoring regulations will be effective upon formal publication in the Federal Register on February 25.
The regulations provide greater flexibility regarding the minimum number of units for which an agency must conduct physical inspections and low-income certifications; do away with the “same unit” rule, which required agencies to conduct both physical inspections and low-income certification reviews on the same units; and permit the physical inspection protocol established under HUD’s Real Estate Assessment Center (REAC) to satisfy the Housing Credit physical inspection requirements.
IRS originally requested comments on its compliance monitoring requirements in Notice 2012-18, which it issued in March of 2012. NCSHA’s response to that request for comments encouraged IRS to reduce and refine the minimum 20 percent physical inspection requirement, decouple physical inspections from low-income certification reviews, and allow for more flexibility in inspection and file review requirements when properties are also subject to inspection by other local, state, or federal agencies. The new compliance monitoring regulations make many of the changes NCSHA sought.
The regulations set the minimum number of units that must undergo a physical inspection at the lesser of 20 percent of the low-income units in the project, rounded up to the nearest whole number, or the number of units set forth in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart, which is included in Revenue Procedure 2016-15. The Reference Chart allows agencies to undertake physical inspections on fewer than 20 percent of the units in larger properties. For example, agencies would be required to inspect only 22 units in properties with between 102 and 130 total Housing Credit qualified units. Prior to these regulations, IRS required Housing Credit agencies to inspect at least 20 percent of all units in the project.
The regulations apply the same number of units standard (the lesser of 20 percent of the units in the building or the number allowed under the Reference Chart) to unit low-income certification reviews. However, the regulations decouple those certification rules from the physical inspection requirement, allowing states the option of conducting certification reviews on units in a property that did not also undergo physical inspection. This will allow states to conduct their physical inspections at a separate time from their certification reviews, giving them greater flexibility to coordinate the timing of Housing Credit physical inspections with physical inspections required under other housing programs. It also allows agencies to conduct certification reviews in the winter time and physical inspections in the summer time when it may be more feasible to visit properties due to weather conditions.
Agencies are allowed to conduct physical inspections and low-income certification reviews on more than the minimum required number of units should the agency believe it appropriate. Because the regulations decouple physical inspections from low-income certifications, agencies may conduct more inspections than certifications, or vice versa, so long as they conduct at least the minimum number of each.
The regulations also permit the REAC protocol to satisfy the Housing Credit inspection requirements so long as the inspection satisfies the following requirements as outlined in Revenue Procedure 2016-15:
- Both vacant and occupied low-income units in the project are included in the population of units from which units are selected for inspection;
- The inspection complies with REAC’s procedural and substantive requirements, including the use of REAC Uniform Physical Condition Standards inspection software;
- The inspection is performed by HUD REAC inspectors; and
- The inspection results are sent to HUD and reviewed and scored within HUD’s secure system without the involvement of the inspector, and HUD makes the inspection report available.
The regulations continue to require agencies to comply with the “all buildings” rule, which states that the agency must conduct on-site inspections in units in all buildings in a project rather than simply applying the minimum number of unit rule on a project-wide basis should a project encompass multiple buildings. The regulations provide an exception to the all buildings rule for agencies that use the REAC protocol to satisfy the physical inspection requirement, though in certain cases REAC may require inspections in all buildings of a project.
The regulations note that the IRS remains open to further comments from interested parties on various issues covered in the regulations, including provisions in Revenue Procedure 2016-15 that define “performed under the REAC protocol” and whether IRS should shorten the reasonable notice time frame that agencies may give owners before undertaking either physical inspections or certification reviews, which currently stands at generally no more than 30 days.
The regulations also provide the opportunity for parties to provide greater detail and justification for proposals made in comments on Notice 2012-18 that IRS decided not to adopt in these regulations, including proposals to allow a risk-based assessment model in place of inspection requirements based on the number of units in a project.
Update: In addition to the regulations and the Revenue Procedure, the IRS February 25 published a cross referenced notice of proposed rulemaking in the Federal Register, which sets May 25 as the due date by which the public must submit comments on the regulations. If you would like to help inform NCSHA’s comments, please contact NCSHA’s Jennifer Schwartz by May 2 with your responses to the questions set out in the regulation.
For more information, contact NCSHA’s Jennifer Schwartz.