Affordable Housing Tax Credits (AHTCs), a crucial tool in the fight against housing inequality, were established under the 1986 Tax Reform Act to encourage the creation of affordable housing, providing a beacon of hope for low-income families.
AHTCs, particularly the Low-Income Housing Tax Credit (LIHTC) program, are designed to encourage the development and preservation of affordable housing for low-income individuals and families. However, like any large-scale government program, the LIHTC program is highly susceptible to fraud and abuse.
Administered at the federal level but allocated through state programs, these credits are provided to developers based on the costs of constructing or rehabilitating rental housing that meets specific affordability criteria.
While AHTCs are intended 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 of AHTCs typically stems from intentional misrepresentations or omissions during the application, development, or operational stages of a project, with offenders seeking to inflate their financial gains.
Such schemes not only undermine the program's purpose but may also lead to significant federal criminal charges. Suppose you find yourself under scrutiny by federal investigators regarding possible fraudulent use of AHTCs. In that case, you may face severe legal consequences, including significant prison time if convicted, underscoring the gravity of the situation.
Fraud Schemes Involving AHTCs
The LIHTC is a ripe target for fraud and abuse, which is perpetrated by tenants, developers, and government officials. Tenants abuse the program by occupying housing units to which they are not eligible, often 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 abuse the LIHTC program for personal gain. Because the states receive a limited amount of valued credits that are handed out in a discretionary manner to developers, it creates an open invitation to corruption.
Lack of oversight has also made the LIHTC program susceptible to abuse. There is little public accounting of the costs that exist, even among government officials and regulators charged with monitoring the program.
The IRS, the primary enforcer of the LIHTC program, is responsible for ensuring compliance with the program's rules and regulations. However, due to the complexity of the LIHTC and the volume of projects, the IRS may struggle to enforce all the rules, creating opportunities for fraud. All of these fraud schemes can lead to the following consequences:
- Financial Loss: Fraudulent activities can result in substantial financial losses for the government and taxpayers. These losses can lead to reduced funding for future affordable housing projects and increased tax burdens on the public.
- Undermining Program Goals: Fraud can undermine the effectiveness of the LIHTC program, hindering its ability to provide affordable housing to those in need.
- Loss of Public Trust: Fraud and corruption erode public trust in government programs and the individuals responsible for them, emphasizing the importance of maintaining integrity in all dealings.
- Legal Penalties: Individuals and entities involved in fraudulent schemes can face severe legal consequences, including fines, imprisonment, and exclusion from participating in future affordable housing programs. These penalties can have long-lasting effects on your personal and professional life, including potential job loss, damage to your reputation, and financial burden.
Let's explore some of the more common types of fraud schemes associated with these credits, including, but not limited to, misrepresentation of construction costs, false tenant information, kickbacks and bribery, collusion with third parties, and applying for duplicate or overlapping credits.
Misrepresentation of Construction Costs
One of the most prevalent fraud schemes involves inflating construction or rehabilitation costs in application materials to secure a higher allocation of tax credits.
For example, developers may submit falsified invoices or agreements with contractors that exaggerate the actual costs incurred for the project. These inflated figures result in larger tax credits, which can then be improperly claimed or sold to investors for a profit.
Simply put, developers may inflate the reported construction costs of a project to secure larger loan amounts and potentially divert excess funds. This is a known risk of fraud, and agencies may not always have sufficient safeguards in place to detect it.
When projects are in financial distress, owners may improperly withdraw funds for personal use instead of addressing the project's needs. Owners may fail to disclose financial interests in companies with which they contract for services related to the affordable housing project.
False Tenant Information
Affordable housing projects receiving tax credits must adhere to strict requirements regarding tenant income levels and rent restrictions. Fraud often occurs when developers or property managers falsify tenant records to demonstrate compliance with these requirements.
This might involve manipulating income verification documents, fabricating tenant applications, or inflating occupancy rates. Such actions give a false impression that the property is meeting its obligations while improperly claiming tax benefits.
Tenants may falsify income or family size information to qualify for benefits or receive larger subsidies than they are entitled to.
Additionally, owners or management companies may make false claims about a property's occupancy or condition, such as certifying that units are occupied when they are vacant or don't meet housing quality standards.
Kickbacks and Bribery
In these scenarios, individuals in positions of power or influence may receive personal monetary gain in exchange for awarding contracts or granting favorable treatment to certain projects or developers. This type of corruption can compromise fair competition and undermine the integrity of the affordable housing sector.
Officials involved in allocating the tax credits may accept bribes or campaign contributions from developers in exchange for approving projects, leading to unfair favoritism and potentially compromising the integrity of the program.
Collusion with Third Parties
Fraud often occurs in collaboration with third parties, such as contractors, financial institutions, or investors. For instance, contractors may knowingly submit inflated bids or invoices to justify higher claimed construction costs, sharing the fraudulent proceeds with developers.
Similarly, investors purchasing tax credits may participate in fraud schemes by failing to perform due diligence on the legitimacy of the project or intentionally turning a blind eye to irregularities.
Applying for Duplicate or Overlapping Credits
Some developers may attempt to claim tax credits for multiple projects using the same application materials or allocate credits to multiple investors in an unlawful manner.
Such schemes may also involve transferring funds or creating fabricated documents between projects to conceal the true nature of the fraud. This practice directly violates the legal limits placed on credit allocations and jeopardizes program integrity.
Federal Statutes Used in Prosecutions
Various federal statutes can be applied to prosecute fraudulent activities involving AHTCs. Depending on the scope and nature of the alleged scheme, individuals may face charges such as:
- Wire Fraud (18 U.S.C. § 1343): Used in cases where electronic communications, such as emails or transactions, are employed to further a fraudulent scheme. For example, submitting inflated invoices via email could lead to wire fraud charges.
- Tax Fraud (26 U.S.C. § 7201): Claiming tax credits based on false statements or fraudulent documentation constitutes tax fraud, a serious offense under federal law. For instance, if a developer submits inflated construction costs to the IRS to claim higher tax credits, this could be considered tax evasion or tax fraud.
- Conspiracy (18 U.S.C. § 371): If two or more individuals worked together to commit fraud, they could be charged with conspiracy to defraud the United States. This charge often applies even if the fraud was not completed.
- False Statements (18 U.S.C. § 1001): Providing inaccurate information on applications or compliance forms required to obtain or retain tax credits can result in this charge.
Potential Sentences Upon Conviction
A conviction for fraud involving Affordable Housing Tax Credits can carry severe penalties, including financial restitution, imprisonment, and fines. For example:
- Wire Fraud: Up to 20 years in federal prison and significant fines.
- Tax Fraud: Up to 5 years in prison and fines of up to $250,000 for individuals.
- Conspiracy: A maximum penalty of 5 years in prison and a fine of up to $250,000.
Additionally, courts may order restitution payments to cover the financial impact of the fraud, which can run into millions of dollars for large-scale schemes. If you are under investigation for a criminal offense related to the Affordable Housing Tax Credits, contact our federal criminal defense lawyers at Eisner Gorin, LLP, located in Los Angeles, California.
Related Content:
If you have one phone call from jail, call us! If you are facing criminal charges,