How much fraud is there in the historic tax credit business?

I'm coming from a design background and transitioning into development. I've worked on historic tax credit projects on the design side, so I have some familiarity with the application process.

It seems obvious that developers have a massive incentive to inflate their qualified rehab expenses in their applications. If the cost is actually $11m but you say it's $12m, and you get 20% federal and 20% state (depending on where you are), you get an extra $400k. And that money's coming straight out of federal and state tax revenue that's now lost. Not a lawyer, but I would think this is felony tax fraud.

What prevents this from happening? Developers' finances can be pretty opaque, and there are lots of ways they could obfuscate things that would be hard for an outsider to unpack. That's especially true when they're GCing projects themselves, which many developers do. At least in my state, the developers who operate in this space to tend to be on the smaller and sometimes shadier side- we're talking two or three man operations, not Related.

In my state, and I think in others, the program is administered by the state historic commission. In my limited interaction with the commission's staff, I've found them to be.... pretty much the type of people you'd expect to do a job like that. People who care about window muntin profiles and historic paint colors. Smart people, but not forensic accountants. Maybe there are some green eyeshade types in the back office I haven't met, though.

I want to sleep soundly at night, so I have zero intention of doing this. But it would be pretty infuriating to know that I'm playing by the rules (and potentially getting a smaller % of a fixed pool of credits on the state level) while getting outcompeted by developers who are committing fraud.

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