The Low-Income Housing Tax Credit (LIHTC) program, a crucial initiative that fosters the development and preservation of affordable housing for low-income individuals and families, holds immense importance in our society. However, like any large-scale government program, it's highly susceptible to fraud and abuse.
The LIHTC fraud schemes, such as developers inflating construction costs, siphoning off excess funds, and making false claims, have a devastating impact on the program's goal of providing affordable housing. These fraudulent activities not only undermine the program but also pose a significant threat to its effectiveness, demanding immediate action.
Some of the most common fraud schemes involve developers submitting inflated construction cost data to state agencies to receive larger tax credits. They may also overstate construction costs to obtain larger loan amounts and then pocket the excess funds.
Sometimes, developers submit fraudulent deeds to housing authorities to establish ownership rights and participate as landlords. In other cases, developers may engage in kickback schemes with contractors or other parties involved in the project. Another type of fraud within the LIHTC is when tenants falsely claim benefits to which they are not entitled.
The Affordable Housing Tax Credits (AHTCs) were established under the 1986 Tax Reform Act to encourage the creation of affordable housing; however, they quickly became vulnerable to fraud schemes, including the misrepresentation of construction costs, kickbacks, and bribery.
Key Takeaways
- Administered at the federal level but allocated through state programs, these credits are provided to developers based on the costs of constructing rental housing that meets specific affordability criteria.
- While AHTCs are supposed to promote community development, the complexity of the program and the significant amounts of money involved have also made it a target for fraud.
- Fraudulent misuse is typically related to intentional misrepresentations or omissions during the application, development, or operational stages of a project, with offenders seeking to inflate their financial gains.
- LIHTC fraud schemes not only undermine the program's purpose but also lead to significant federal criminal charges, substantial financial losses for the government and taxpayers, and erosion of public trust in government programs and the individuals responsible for them.
- The legal consequences for such fraud are severe, including fines and imprisonment.
Who Commits LIHTC Fraud?
Various parties commit LIHTC fraud. Tenants abuse the program by occupying housing units to which they are not eligible by claiming a false income level on disclosure forms. Developers abuse the program by inflating their reported construction costs to receive excess tax credits. Government officials may also be involved in fraudulent activities.
Developers abuse the program by inflating their reported construction costs to receive excess tax credits. Because the states receive a limited amount of valuable credits that are distributed in a discretionary manner to developers, it's an invitation to corruption.
Further, lack of oversight has also made the LIHTC program susceptible to abuse. The Internal Revenue Service (IRS) is often overwhelmed by the effort required to enforce all the complex rules, resulting in the following consequences:
- Substantial financial losses for the government and taxpayers.
- Undermining the effectiveness of the program, hindering its ability to provide affordable housing to those in need.
- Erosion of public trust in government programs and the individuals responsible for them.
- Individuals and entities involved in fraudulent schemes can face severe legal consequences, including fines and imprisonment.
Common LIHTC Fraud Schemes
Let's review some of the more common types of fraud schemes associated with low-income housing tax credits, such as the following:
- Falsified Construction Costs. This fraud scheme involves inflating construction or rehabilitation costs in application materials to secure a higher allocation of tax credits. Often, developers submit falsified invoices to contractors that exaggerate the actual costs. The inflated figures result in larger tax credits, which can then be improperly claimed or sold to investors for a profit.
- Falsified Tenant Information. Affordable housing projects that receive tax credits must adhere to strict requirements regarding tenant income levels and rent restrictions. Fraud often occurs when property managers falsify tenant records to demonstrate compliance with these requirements, such as manipulating income verification documents, fabricating tenant applications, or inflating occupancy rates. Tenants may falsify income or family size information to qualify for benefits or receive larger subsidies than they are entitled to.
- Kickbacks and Bribery. Often, individuals in positions of power may receive personal monetary gain in exchange for awarding contracts or granting favorable treatment to certain projects or developers. Officials involved in allocating the tax credits may accept bribes or campaign contributions from developers in exchange for approving projects.
- Third Party Collusion. Fraud can occur in collaboration with third parties, such as contractors, financial institutions, or investors. Contractors might knowingly submit inflated bids or invoices to justify higher claimed construction costs, then share the fraudulent proceeds with developers. Investors purchasing tax credits may fail to perform due diligence on the legitimacy of the project.
- Duplicate or Overlapping Credits. Developers might attempt to claim tax credits for multiple projects using the same application materials. This scheme involves transferring funds or creating fabricated documents between projects to conceal the true nature of the fraud.
Criminal Statutes Used to Prosecute
Different federal statutes can be used to prosecute fraudulent activities involving LIHTCs, depending on the nature of the alleged scheme.
Wire fraud, as defined under 18 U.S.C. § 1343, is used in cases where electronic communications, such as emails or transactions, are utilized to further a fraudulent scheme. For example, submitting inflated invoices via email could lead to wire fraud charges. Wire fraud carries a potential sentence of up to 20 years in federal prison and significant fines.
Tax Fraud, as defined under 26 U.S.C. § 7201, occurs when someone claims tax credits based on false statements or fraudulent documentation, constituting a serious offense under federal law. A tax fraud conviction carries a potential sentence of up to 5 years in prison and fines of up to $250,000 for individuals.
Conspiracy, as defined under 18 U.S.C. § 371, can be used when two or more individuals work together to commit fraud. This statute is used when there is a conspiracy to defraud the United States. This law often applies even if the fraud was not completed. A conspiracy conviction carries a maximum penalty of 5 years in prison and a fine of up to $250,000.
False Statements, as defined under 18 U.S.C. § 1001, are used by federal prosecutors when someone provides inaccurate information on applications or compliance forms required to obtain or retain tax credits. Can result in this charge.
If you were accused of committing fraud related to the Low-Income Housing Tax Credit (LIHTC) program, contact our federal criminal defense lawyers to review the case and develop a strategy to obtain the best possible outcome. Cron, Israels & Stark is located in Los Angeles, CA.
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