Over its nearly 40-year history, the federal low income housing tax credit (LIHTC) program has been both a success story and a target for various forms of fraud. The LIHTC program has been credited with facilitating the construction of millions of homes for low-income individuals and families; and, yet, at the same time, it has also been blamed for potentially billions of dollars in fraudulent taxpayer losses.
Despite the widely recognized risk of fraud and abuse under the LIHTC program, the federal government has done relatively little to address the problem. However, this could be changing. We have recently seen the Internal Revenue Service (IRS) and U.S. Department of Justice (DOJ) target LIHTC fraud—and, if this becomes a trend, we could see more audits and investigations involving allegations of LIHTC fraud in the years ahead.
“Allegations of fraud under the low income housing tax credit (LIHTC) program can pose substantial risks for developers, investors, state and local officials, and others. These allegations can lead to both civil enforcement and criminal prosecution at the federal level—with criminal charges carrying both fines and prison time.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
The LIHTC program is fairly unique among federal tax credits in that it involves federal funds disbursed at the state level. As the Tax Policy Center explains, “The federal government issues tax credits to state and territorial governments. State housing agencies then award the credits to private developers of affordable rental housing projects through a competitive process. Developers generally sell the credits to private investors . . . [who] can claim LIHTCs over a 10-year period.” Ultimately, however, the IRS is responsible for administering the LIHTC program; and, in cases of suspected LIHTC fraud, the DOJ can pursue prosecution under both tax-specific and non-tax-specific federal statutes.
Key Questions When Facing Scrutiny Related to the LIHTC Program
When facing scrutiny related to the LIHTC program, a strategic defense is critical. In this scenario, avoiding unnecessary consequences—for developers, investors, state and local officials, and others—starts with making informed decisions, and this requires a clear and comprehensive understanding of the specific circumstances and allegations at hand.
With this in mind, here are five key considerations for defending against LIHTC fraud allegations:
1. What is the Nature of the Inquiry?
The first key consideration is the nature of the inquiry. Audits conducted by the IRS, investigations conducted by IRS Criminal Investigation (IRS CI), investigations involving the DOJ, and enforcement actions involving state and local authorities all present different challenges and risks. This means that they all present different opportunities for executing an effective defense strategy as well.
In some cases, the nature of the inquiry will be fairly obvious (i.e., if you receive an audit letter from the IRS). In others, however, it won’t necessarily be clear which authority (or authorities) are involved. It also might not be clear whether the inquiry is civil or criminal in nature. Given that different types of inquiries present different challenges, risks, and opportunities, discerning the nature of the inquiry is a critical first step toward implementing a strategic defense.
2. What Are the Specific Allegations At Issue?
Along with discerning the nature of the inquiry, it is also important to quickly identify the specific allegations at issue. Allegations of LIHTC fraud can take a variety of forms, and understanding the specific allegations you need to defend against is essential for implementing a strategic defense as well. Some examples of potential allegations in LIHTC fraud cases include:
- Fraudulently Selling Non-Existent Low Income Housing Tax Credits – The IRS and DOJ have targeted parties suspected of fraudulent selling non-existent low income housing tax credits. As discussed above, developers typically acquire LIHTCs from state and local authorities before selling them to investors to raise funds for their development projects. Selling tax credits that a developer (or another party) does not have the rights to sell can create exposure to serious federal criminal allegations.
- Overcharging for Low-Income Housing Developed Under the LIHTC Program – The Government Accountability Office (GAO) and other authorities have raised concerns about developers, contractors, and subcontractors overcharging for low-income housing developed under the LIHTC program. Due to these concerns, the GAO has recommended that Congress and the IRS both take action to improve the verification of cost data. To date, however, neither Congress nor the IRS has done so. Even so, overcharging concerns have led to audits and investigations in some cases.
- Collusion and Kickback Schemes – Collusion and kickback schemes involving developers and investors can also lead to fraud allegations under various federal laws. In these cases, all parties involved in an alleged scheme can face allegations; and, crucially, “successful” collusion to improperly secure a tax credit or actual payment of a proposed kickback is not required.
- Noncompliance with the Strict Income Limits for Tenant Eligibility – Developers can also face fraud allegations under the LIHTC if they fail to comply (either intentionally or unintentionally) with the program’s strict income limits for tenant eligibility. The LIHTC program is intended specifically to incentivize the development of housing for individuals and families that cannot afford to pay local market rental rates. Approving tenants who earn more and are more likely to pay rent or who can pay higher rent rates are both considered forms of LIHTC fraud.
- Other Forms of LIHTC Program Noncompliance – According to the CATO Institute, “The LIHTC statute and related IRS regulations are 442 pages in length. The IRS auditing guide for the LIHTC is 344 pages. An IRS guide for LIHTC building compliance is 214 pages. State compliance manuals for LIHTC building owners can run 145 pages. A standard industry guidebook for the LIHTC is 1,942 pages.” However, the LIHTC program’s complexity is not an excuse for noncompliance. As with other types of federal benefit programs, any form of noncompliance under the LIHTC program has the potential to lead to federal scrutiny.
- Bribery and Corruption Involving State and Local Officials – The CATO Institute also reports that, “the LIHTC can be a vehicle for state and local corruption because officials have discretion in handing out the lucrative credits.” There have been multiple reported cases of state representatives, state treasurers, city council members, city planning commissioners, and other officials facing prosecution for soliciting or accepting bribes (or both) in relation to their decisions to award low income housing tax credits to certain developers.
Again, these are just examples. Allegations of LIHTC fraud can take other forms as well, and all types of allegations can present risks for civil enforcement or criminal prosecution at the federal level.
3. Can You Prove LIHTC Program Compliance?
Once you know the nature of the inquiry and the specific allegations at issue, then the next key consideration is your level of risk. Assessing your level of risk starts with answering a fundamental question: Can you prove LIHTC program compliance?
If you can affirmatively demonstrate compliance with the LIHTC programs’ requirements and prohibitions, it should be possible to steer the inquiry toward a resolution that avoids any type of civil or criminal penalties (though it will still be important to carefully consider what information you want to voluntarily provide to the federal government). On the other hand, if you cannot affirmatively demonstrate compliance, you will need to determine what other defense options you have available.
4. Can the IRS or DOJ Prove LIHTC Program Noncompliance?
When it isn’t possible to prove LIHTC program compliance, the key question then becomes: Can the IRS or DOJ prove LIHTC program noncompliance? Of course, in all cases, the government has the burden of proof—so affirmatively demonstrating compliance is never required. However, proving compliance can be an efficient and effective defense strategy, and it will typically make sense to prove compliance when possible.
To impose additional tax liability or pursue civil or criminal enforcement action, the federal government must have sufficient evidence to warrant doing so. As a result, raising legitimate questions about the sufficiency (or admissibility) of the government’s evidence can be an effective defense strategy as well. If the government cannot build a case against you, it doesn’t matter if you have violated the terms of the LIHTC program.
5. What is the Best Approach Under the Circumstances at Hand?
Ultimately, mounting a successful defense to allegations of LIHTC fraud involves pursuing the best approach under the circumstances at hand. Determining what is “best” under the circumstances requires careful consideration of all of the factors discussed above. Are you at risk of facing administrative (i.e., additional tax), civil, or criminal penalties? What are the specific allegations against you? Can you prove LIHTC compliance? Can the government prove noncompliance? The answers to all of these questions are fundamentally important for determining your next steps.
At present, LIHTC fraud appears to be an under-prosecuted offense according to GAO data and other sources. However, there is evidence to suggest that this could change. In any case, facing allegations of LIHTC fraud presents serious risks, and defending against the IRS’s or DOJ’s allegations effectively is essential for avoiding unnecessary consequences.
