What LIHTC project owners should know about new IRS compliance-monitoring rules.

• Author: Reaman, Susan
• Position: Low-income housing tax credit

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.

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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% rale), 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...