Report 2020-108 Recommendation 13 Responses

Report 2020-108: California's Housing Agencies: The State Must Overhaul Its Approach to Affordable Housing Development to Help Relieve Millions of Californians' Burdensome Housing Costs (Release Date: November 2020)

Recommendation #13 To: Tax Credit Allocation Committee, California

To ensure that it complies with federal law, the Tax Committee should report all instances of noncompliance to the IRS unless federal law or guidance provides an exception.

Annual Follow-Up Agency Response From October 2022

In January 2021, CTCAC updated its procedures to include ALL occurrences of non-compliance on the IRS 8823 form. Since CTCAC resumed physical inspections of properties in June 2022, it has submitted 313 Form 8823's to the IRS that all contained all occurrences of non-compliance, whether corrected or not. This is an ongoing policy and practice. This recommendation has been fully implemented.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

The Tax Committee provided its updated procedures for reporting all physical issues to the IRS.

1-Year Agency Response

IRS Notices 2020-53 and 2021-12 provided for a moratorium on all inspections for the period of April 1, 2020 through December 31, 2020 (2020-53) and were then extended through September 30, 2021 (2021-12). During the moratorium period, CTCAC determined that staff would continue to complete desk audits of the projects in their normal monitoring cycle so as not to disrupt the cycle of inspections and to ensure that properties were continuing to uphold the regulations, policies, and requirements of the Program during the COVID-19 Pandemic, even though CTCAC was not mandated to do so.

As of October 1, 2021, CTCAC Staff has resumed conducting physical inspections for all properties. Staff are required to report all instances of physical noncompliance observed on a property. Due to the nature of the post inspection cycle - Inspection date, 45-day window to send noncompliance letter to owner, 60-day owner correction response period, 8823 preparation, processing, and review - CTCAC anticipates that the 1st 8823 Forms reporting all levels of observed physical noncompliance will go out in late December 2021.

California State Auditor's Assessment of 1-Year Status: Pending

6-Month Agency Response

To ensure compliance with federal law, CTCAC staff requires all physical non-compliance to the IRS (includes all level 1, 2, 3 and Health & Safety UPCS violations) to be reported to the IRS. On Jan 15, 2021, the IRS released guidance extending relief from compliance monitoring from Apr 1, 2020 through Sep 30, 2021. CTCAC staff continues to complete desk audits in lieu of physical audits as permitted in the IRS notice. CTCAC released a memorandum on Feb 5, 2021 to all project owners and management companies of low income housing tax credit properties informing them that CTCAC staff will resume physicals inspections beginning Oct 1, 2021 as permitted by the IRS notice. Upon resuming these physical inspections, CTCAC staff will report all physical non-compliance to the IRS (includes all level 1, 2, 3 and Health & Safety UPCS violations). CTCAC staff convened workshops between Mar and May 2021 to inform owners and management companies of the updated reporting requirements to the IRS. In the spring of 2021, CTCAC made annual updates to the Compliance Manual which include an update to Section 7.6 to clarify to program users of CTCAC's responsibility to report noncompliance to the IRS. Section 7.6 (Page 95) now references that IRS Form 8823 will be issued for any UPCS violations as opposed to specifically referencing Level 2 and 3 UPCS violations. The policy of reporting all physical non-compliance to the IRS is in place, and reporting will officially take place when physical inspections recommence on Oct 1, 2021. CTCAC released a memorandum on May 12, 2021 providing monitoring guidance updates for 2021 to all project owners and management companies. The updates include the requirement to report to the IRS all levels of Uniform Physical Condition Standards (UPCS) violations (Levels 1-3 and Health and Safety Violations) for all properties in the initial 15-year Federal Compliance Period.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

The Tax Committee updated its policy and issued a memo related to reporting all instances of noncompliance to the IRS. However, because the IRS has not required the Tax Committee to conduct monitoring inspections that would identify instances of noncompliance from April 1, 2020 to September 30, 2021, we will keep this recommendation open until monitoring inspections resume and the Tax Committee provides examples of reporting instances of noncompliance to the IRS.

60-Day Agency Response

In July of 2020, the IRS published guidance granting allocating agencies relief from compliance monitoring from April 1, 2020 through December 31, 2020. Although relief to these requirements were provided, CTCAC Compliance Section monitoring staff continued to complete desk audits throughout the end of 2020, but discontinued physical audits. In January, 2021 all Compliance Section monitoring staff were notified that moving forward staff will be required to report all physical non-compliance to the IRS (includes all level 1, 2, 3 and Health & Safety UPCS violations). Due to the continuing pandemic, Compliance Section staff will only complete file reviews of projects and hold all physical inspections until after July 2021 (unless further IRS monitoring relief is provided). When Compliance Section staff resume physicals inspections, additional Compliance Section staff will be pulled from monitoring to assist the current staff member that reviews all monthly 8823's. Compliance Section management believes re-assigning staff from monitoring will be possible due to the additional SSA/AGPA positions authorized in 2020.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2020-108

Agency responses received are posted verbatim.