Section 42, Low-Income Housing Credit Compliance-Monitoring Regulations
| Published date | 07 July 2020 |
| Citation | 85 FR 40610 |
| Record Number | 2020-14555 |
| Section | Proposed rules |
| Court | Internal Revenue Service,Treasury Department |
Federal Register, Volume 85 Issue 130 (Tuesday, July 7, 2020)
[Federal Register Volume 85, Number 130 (Tuesday, July 7, 2020)]
[Proposed Rules]
[Pages 40610-40612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14555]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 85, No. 130 / Tuesday, July 7, 2020 /
Proposed Rules
[[Page 40610]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-123027-19]
RIN 1545-BP59
Section 42, Low-Income Housing Credit Compliance-Monitoring
Regulations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations relating to the
compliance-monitoring duties of State or local housing credit agencies
(Agencies) for purposes of the low-income housing credit under section
42 of the Internal Revenue Code (Code). These proposed regulations
would relax the minimum compliance-monitoring sampling requirement for
purposes of physical inspections and low-income certification review
provided in the Amendments to the Low-Income Housing Credit Compliance-
Monitoring Regulations (T.D. 9848) published in the Federal Register
(84 FR 6076). The proposed regulations will affect owners of low-income
housing projects, tenants in those low-income housing projects, and
Agencies that administer the credit.
DATES: Written or electronic comments and requests for a public hearing
must be received by September 8, 2020.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-123027-
19) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable. The Department of the Treasury (Treasury
Department) and the IRS will publish for public availability any
comment submitted electronically, and to the extent practicable on
paper, to its public docket.
Send paper submissions to: CC:PA:LPD:PR (REG-123027-19), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Dillon Taylor or Michael J. Torruella Costa at (202) 317-4137;
concerning submissions of comments and/or requests for a public
hearing, Regina Johnson, (202) 317-5177 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 42 of the Code.
Section 42(m)(1) requires an Agency to allocate housing credit
dollar amounts (the potential to earn low-income housing credits) among
candidate proposed buildings/projects. The allocation must be pursuant
to a qualified allocation plan (QAP) that has been approved by the
governmental unit of which the Agency is a part. A QAP not only sets
forth selection criteria by which an Agency makes these allocations but
also provides a procedure that the Agency must follow in monitoring for
noncompliance with the provisions of section 42, including monitoring
for noncompliance with habitability standards through regular site
visits.
Section 1.42-5 of the Income Tax Regulations (the compliance-
monitoring regulations) provides the requirements of a monitoring
procedure that must be part of any QAP. Among the requirements, an
Agency must perform physical inspections and low-income certification
review.
The compliance-monitoring regulations, however, do not require that
every low-income unit in a project be monitored for non-compliance.
Instead, Agencies are permitted to satisfy their compliance-monitoring
duties by physically inspecting, and performing low-income
certification review, on only samples of those units. See T.D. 8430, 57
FR 40118, 40121 (Sept. 2, 1992).\1\ For many years, starting in 2000,
the minimum sample size for both file review and on-site inspections
was 20 percent of the low-income units, regardless of the size of the
total population of low-income units in a project. See TD 8859, 65 FR
2323, 2327 (Jan. 14, 2000).
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\1\ Initially, the requirements were that the Agency choose
which units receive low-income certification review, that the owner
receive no more than reasonable notice of the review, and that the
Agency have the right to perform on-site inspection. See TD 8430 at
40122-23. Subsequently, some on-site inspections were required, and
samples for both review and inspection were required to be chosen
randomly. See TD 8859, 65 FR 2323, 2327 (Jan. 14, 2000).
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On February 25, 2016, the Treasury Department and the IRS published
temporary regulations (T.D. 9753) in the Federal Register (81 FR 9333),
which amended Sec. 1.42-5 of the Income Tax Regulations and permitted
the IRS to establish sample-size criteria in guidance published in the
Internal Revenue Bulletin. See Sec. 601.601(d)(2)(ii)(b) of 26 CFR
Chapter 1.\2\ Concurrently with the issuance of the temporary
regulations, Revenue Procedure 2016-15, 2016-11 I.R.B. 435, was
published in the Internal Revenue Bulletin. This revenue procedure
permitted an Agency to elect to use sample sizes of either a minimum of
20 percent of the low-income units in a project (rounded up to the
nearest whole number) or the number in a chart identifying minimum
sample sizes depending on the number of low-income units in a project
(the Low-Income Housing Credit Minimum Unit Sample Size Reference
Chart). The minimum sample sizes in the chart correspond to the minimum
sample sizes required by the Department of Housing and Urban
Development's (HUD's) Real Estate Assessment Center for inspections
under HUD programs (the REAC numbers). HUD designed this table of
sample sizes to produce a statistically consistent level of confidence
in the results of physical inspections across a broad range of project
sizes.
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\2\ Also in the same issue of the Federal Register, the Treasury
Department and the IRS published a notice of proposed rulemaking
(REG-150349-12, 81 FR 9379) (proposed regulations). The text of the
proposed regulations incorporated by cross-reference the text of the
temporary regulations.
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[[Page 40611]]
The revenue procedure had the effect of reducing the minimum sample
sizes for large low-income housing projects (those with more than 110
low-income units). Because of the choice between using the REAC number
and 20 percent of the low-income units, the revenue procedure did not
impact projects with fewer than 111 low-income units.
The same sample-size provisions applied to independently selected
samples on which the Agency must perform low-income certification
review. The revenue procedure provided only minimum sample sizes,
permitting Agencies to monitor compliance in more units, if desired.
In the preamble to the temporary regulations, the Treasury
Department and the IRS expressed concern that, in smaller projects,
physical inspection or low-income certification review of only 20
percent of the units might fail to produce sufficiently accurate
estimates of the remaining units' overall compliance with habitability
and low-income certification. To address this concern, the preamble
added that ``the Treasury Department and the IRS intend to consider
whether Rev. Proc. 2016-15 should be replaced with a revenue procedure
that does not permit use of the 20 percent rule in those
circumstances.'' 81 FR at 9334. The removal of the 20 percent option
would generally increase the number of units that needed to be
inspected in smaller projects. The public comments on the temporary
regulations directed very little attention to this potential increase.
In addition, the preamble invited fundamental suggestions to make
inspections less burdensome:
The Treasury Department and the IRS believe the methods in Rev.
Proc. 2016-15 reasonably balance the burden on Agencies, tenants,
and building owners while adequately monitoring compliance. However,
additional comments may be submitted on other possible methods,
including stratified sampling procedures and estimation
methodologies. To be useful, any such comments should include
substantial detail regarding the procedures to be adopted and should
provide thorough justification as to whether the suggested methods
effectively reduce burden without negatively impacting the
confidence that can be placed in the results obtained from the
resulting samples.
Id. at 9336. The public submitted no comment letters specifically
responsive to this request.
On February 26, 2019, the Treasury Department and IRS published
regulations (T.D. 9848) in the Federal Register (84 FR 6076),
finalizing the temporary regulations. Because these final regulations
contain provisions directly addressing all issues previously addressed
in Revenue Procedure 2016-15, the preamble of the final regulations
declares that revenue procedure obsolete with respect to an Agency as
of the date on which the Agency's QAP is amended to reflect the final
regulations and, in all cases, after December 31, 2020. See 84 FR at
6078. Among other provisions, the final regulations require Agencies to
inspect no fewer units than the number specified for projects of the
relevant size in the REAC numbers. This requirement has the effect of
increasing the sample sizes for smaller projects. The Treasury
Department and the IRS determined that the REAC numbers produce a
statistically valid sampling of units and that using them yielded a
consistent level of confidence in the compliance-monitoring results for
projects of various sizes. The final regulations allow Agencies a
reasonable period of time to amend their QAPs for this purpose, but
require QAPs to be amended no later than December 31, 2020.
Since the publication of the final regulations, the Treasury
Department and the IRS have received numerous oral and written comments
from Agencies, stakeholders, and trade groups representing Agencies. In
particular, these comments expressed concern that the final regulations
ended Agencies' ability to use samples of 20 percent of the low-income
units in a project when the applicable REAC number is larger.
Consistent with the comments and letters, the trade groups' comment
letters expressed concern about the situations in which the REAC
numbers would increase the number of units that Agencies must examine,
thereby increasing Agencies' costs for additional staff and other
related expenditures and burdens. One trade group further explained
that many Agencies would encounter difficulty in addressing increased
staffing needs and other new costs due to overall State budget
constraints. The trade group observed that cost increases are also
likely to cause Agencies to increase the compliance-monitoring fees
that they charge to building owners. If fees are not increased enough
to cover the increased costs, Agencies will have to divert resources
from other affordable housing priorities to fund their compliance-
monitoring activities. The trade group noted that terminating the
ability to use the 20 percent samples will have its most significant
impact on States with numerous small projects, predominantly in rural
areas, and that some States with only small projects may even
experience a 100 percent increase in burden.
Explanation of Provisions
The final regulations reflected the belief of the Treasury
Department and the IRS that a higher compliance-monitoring burden on
Agencies was justified by the increased statistical confidence that
results from the use of the REAC numbers to determine sample sizes for
smaller projects. 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. 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.
Although there is value in providing a level of confidence that is
more consistent over a broad range of project sizes, that increased
consistency is outweighed in this context by concerns over Agencies'
compliance-monitoring burdens. One goal of the compliance-monitoring
regulations is to increase flexibility and reduce burden, so that
Agencies may fulfill their compliance-monitoring responsibilities in an
efficient and cost-effective manner. Accordingly, the Treasury
Department and the IRS propose returning to the sample-size
requirements that applied under the temporary regulations. Thus, under
these proposed regulations, the minimum number of low-income units that
must be included in the random samples on which an Agency conducts
physical inspections or low-income certification review is the lesser
of the applicable REAC number or 20 percent of the low-income units in
the project, rounded up to the next whole number.
Proposed Applicability Date
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
[[Page 40612]]
the calendar year following the year that contains the date these
regulations are published as final regulations in the Federal Register.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter
6) it is hereby certified that these regulations will not impose a
significant economic impact on a substantial number of small entities.
These regulations reinstate the minimum compliance-monitoring sampling
requirement for purposes of physical inspections and low-income
certification review previously provided under the temporary
regulations (T.D. 9753) published in the Federal Register (81 FR 9333)
on February 25, 2016. These previously provided requirements had been
and continue to be relied upon by Agencies since 2016.
Pursuant to section 7805(f) of the Internal Revenue Code, these
regulations will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small
business.
Comments and Requests for a Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to comments that are
submitted timely to the IRS as prescribed in the preamble under the
ADDRESSES section. The Treasury Department and the IRS request comments
on all aspects of the proposed regulations. Any electronic comments
submitted, and to the extent practicable any paper comments submitted,
will be made available at www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 IRB 1, provides that until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
Drafting Information
The principal authors of these regulations are Dillon Taylor and
Michael J. Torruella Costa, Office of the Associate Chief Counsel
(Passthroughs and Special Industries). However, other personnel from
the Treasury Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Amend Sec. 1.42-5 by revising paragraphs (c)(2)(iii)(B) and
(h) to read as follows:
Sec. 1.42-5 Monitoring compliance with low-income housing credit
requirements.
* * * * *
(c) * * *
(2) * * *
(iii) * * *
(B) Number of low-income units. The minimum number of low-income
units for which the Agency must conduct on-site inspections and low-
income certification review is the lesser of--
(1) 20 percent of the low-income units in the low-income housing
project, rounded up to the nearest whole number of units; or
(2) the Minimum Unit Sample Size set forth in the following Low-
Income Housing Credit Minimum Unit Sample Size Reference Chart:
Table 1 to Paragraph (c)(2)(iii)
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Number of low-
income units
selected for
inspection or
Number of low-income units in the low-income housing for low-income
project certification
review (minimum
unit sample
size)
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1..................................................... 1
2..................................................... 2
3..................................................... 3
4..................................................... 4
5-6................................................... 5
7..................................................... 6
8-9................................................... 7
10-11................................................. 8
12-13................................................. 9
14-16................................................. 10
17-18................................................. 11
19-21................................................. 12
22-25................................................. 13
26-29................................................. 14
30-34................................................. 15
35-40................................................. 16
41-47................................................. 17
48-56................................................. 18
57-67................................................. 19
68-81................................................. 20
82-101................................................ 21
102-130............................................... 22
131-175............................................... 23
176-257............................................... 24
258-449............................................... 25
450-1,461............................................. 26
1,462-9,999........................................... 27
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* * * * *
(h) Applicability dates. The requirements in paragraph
(c)(2)(iii)(B) of this section apply beginning after the date final
regulations are published in the Federal Register.
Douglas W. O'Donnell,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-14555 Filed 7-2-20; 4:15 pm]
BILLING CODE 4830-01-P
