On July 2, 2020, the IRS released an advanced copy of proposed regulations concerning physical inspections and file audits of LIHTC properties. This proposed legislation would restore the earlier standard of using the lesser of either 20% of low-income units or the applicable sample on the REAC sampling chart. This update would reverse the sampling requirements in the final rule published on February 26, 2019 (84 FR 6076), which removed the 20% sample size for smaller properties in favor of the sampling methodology used by REAC. Since the publication of this rule, industry groups such as NCHSA and others advocated for a return to the 20% sample size because of the undue burden that a larger inspection sample would have on smaller properties – many of which are in rural areas. In the end, the IRS agreed that the increased cost for staffing to perform the additional inspections outweighed any possible positive gains of a larger statistical sample.
As a result of these comments, the Treasury Department and the IRS have a greater awareness of the many practical challenges Agencies experience in using samples greater than 20 percent while carrying out their compliance-monitoring responsibilities. Furthermore, the comments noted that many Agencies typically evaluate each project to determine if circumstances warrant the inspection and review of more units than the required minimum. Complying with the REAC numbers when an Agency believes that smaller samples would be sufficient may have the effect of depriving the Agency of the resources that it requires to engage in additional compliance-monitoring activities on projects that manifest the need for inspection and review of more than the minimum sample of units.
When will The New Rules for LIHTC Inspections Go Into Effect?
This final rule has not officially gone into effect, and Housing Finance Authorities will need to update QAP’s (Qualified Allocation Plan). However, this proposed rule indicates that the sampling guidelines can be applied retroactively:
These regulations are proposed to apply beginning after the date these regulations are published as final regulations in the Federal Register. However, an Agency may rely on these proposed regulations beginning on February 26, 2019, until December 31 of the calendar year following the year that contains the date these regulations are published as final regulations in the Federal Register.
Once this rule has been finalized and published, we will add an additional post to clarify more information about when and how this change will be applied.
