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IRS, Treasury Issue Proposed Rule Relaxing Compliance Monitoring Sample Sizes

Published on July 1, 2020 by Jennifer Schwartz
IRS, Treasury Issue Proposed Rule Relaxing Compliance Monitoring Sample Sizes

In a massive victory for NCSHA and the state housing finance agencies, IRS and Treasury today published a proposed rule repealing the Housing Credit compliance monitoring sample size methodology that the Service and the department adopted in final regulations issued in February 2019. Those regulations, which NCSHA strongly opposed, would have gone into practical effect no later than January 1, 2021. Instead, the proposed rule IRS and Treasury released today reinstates previous policy in place from 2016 until IRS published the 2019 regulations. The new policy (as was the case from 2016 until 2019) requires Housing Credit agencies to monitor the lesser of 20 percent of the units in a project or the number of units in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart (the chart). NCSHA applauds IRS and Treasury for their willingness to consider the concerns NCSHA and HFAs have raised and for modifying these regulations in response.

The 2019 final regulations would have removed the 20 percent threshold, requiring sample sizes to be based off the number in the chart for all properties. While the 2019 final regulation went into effect upon its publication, it allowed Housing Credit agencies until the end of 2020 to implement it, and most have not yet done so in the hopes that IRS would rescind it.

The 2019 final regulation also reduced from 30 to 15 days the reasonable notice period that Housing Credit agencies may provide to owners before upcoming monitoring visits. The proposed rule released today does not modify the reasonable notice period, which remains at 15 days.

NCSHA strongly objected to the 2019 final rule in multiple communications with IRS and Treasury, beginning with a letter NCSHA sent to IRS in May 2019, in which we argued that the rule imposed an immense and costly new regulatory burden on state Housing Credit agencies. In the summer of 2019, NCSHA commissioned Abt Associates to provide an unbiased, third-party analysis of the sampling approach IRS adopted in the 2019 final rule, and met with senior IRS, Treasury, and HUD officials to discuss the results of that analysis. NCSHA also objected to the compliance monitoring regulations in our comments to the White House Council on Eliminating Regulatory Barriers to Affordable Housing.

In addition to NCSHA, many individual HFAs also pressed IRS to rescind the regulations — at least 29 HFA executive directors sent letters to IRS raising their concerns about the impact the regulations would have in their states.

Our efforts clearly had a considerable impact. The proposed rule states:

“The comments on the final regulations, however, have demonstrated the magnitude of the increased costs and burdens that this requirement imposes on Agencies. As a result of these comments, the Treasury Department and the IRS have greater awareness of the many practical challenges Agencies experience in using samples greater than 20 percent while carrying out their compliance-monitoring responsibilities.” 

The proposed rule is effective immediately, and Housing Credit agencies may rely on it retroactively to February 26, 2019 (the date on which the 2019 final rule was published).

Before the proposed rule will be made final, IRS and Treasury will consider comments and requests for a public hearing. Comments must be made within 60 days of the proposed rule’s publication in the Federal Register, which we expect to be soon. NCSHA will be submitting comments, so please provide feedback to Jennifer Schwartz by August 14.