Follow Four Tips to Prevent Owners from Losing Credits Claimed Too Soon
In the Fall 2016 Special Issue, we discussed how a site owner may comply with first-year certification requirements under Internal Revenue Code (IRC) Section 42(l)(1). Making the certification involves Form 8609, Low-Income Housing Credit Allocation and Certification. The agency executes Part I and then mails the Form 8609 to the owner. The owner then completes the certification required under IRC Section 42(l)(1) for the first year of the credit period by completing Part II of the Form 8609 and submitting it, one time, to the IRS.
Part I of Form 8609, completed and signed by the state agency, documents approval of the finished low-income housing building and identifies the amount of the allowable annual low-income housing tax credit.
Naturally, tax credit owners want to start claiming the credits state housing agencies have allocated to them as soon as possible. But in a rush to start claiming credits, some owners may claim tax credits before their state housing agency issues the IRS Form 8609. Owners may file tax returns with only Part II of Form 8609 attached with an explanation that the owner has provided the state agency with all the information necessary for the state agency to make a final determination of the credit amount.
The IRS takes this seriously. To the IRS, there’s always the possibility that an owner is fraudulently claiming the credit. Further, even if the taxpayer has entered into a contract with the state agency, the IRS has no way of knowing that the state agency has approved the completed project, the amount of credit the owner is entitled to claim, or the terms of the allocation until the taxpayer completes the IRC Section 42(l)(1) certification. Claiming credits too soon or failure to provide a reasonable cause will result in the disallowance and/or recapture of tax credits.
As the manager of a tax credit site, you’re responsible for making sure the owner can claim all the credits it’s entitled to. So when you begin to manage a site, you should warn the owner to not claim credits too early. Heed the following four tips to help make sure a site’s tax credits stay safe.
Tip #1: Wait Until State Issues Form 8609 Before Claiming Credits
Tell the owner that it can’t claim any credits until your state housing agency issues the Form 8609 for the building or site. If the owner claims credits before the form is issued, the IRS may disallow all the credits it claimed.
Under the tax credit law, after a building is placed in service, the state housing agency must complete Part I of the Form 8609 and send the form to the IRS. The IRS uses the form to keep track of the credits allocated to the building or site. The agency must also send a copy of the form to the owner.
The owner must complete Part II of the form and attach it to its tax return when it starts to claim credits. The owner must attach a completed Form 8609 when filing the tax return on which it first claims credits for a building or site. Under the tax credit rules, an owner can’t satisfy its first-year certification requirement unless the Form 8609 is complete. The IRS says it won’t allow an owner to claim any credits without submitting a completed Form 8609, unless the owner can prove it had “reasonable cause” for doing so, and proving reasonable cause can be difficult.
Reasonable cause means that the owner exercised ordinary business care and prudence in determining its tax obligations but is unable to comply with those obligations. To establish reasonable cause, the owner must explain why it claimed the credit before completing the IRC 42(l)(1) certification. Owners may argue that the circumstances were beyond their control: The Forms 8609 were requested in a timely manner from the state agency after the end of the year in which the property was placed in service, but were not received before filing its tax return. During an audit, the IRS may consider the following factors:
- When was the request for the Forms 8609 made? What follow-up efforts did the owner make to secure the Forms 8609?
- Why did the state agency fail to provide the Forms 8609 (Part I completed and signed)? State agencies generally attempt to provide the completed forms quickly. Failure to do so could indicate a problem such as the cost certifications may not be complete, the state may have determined that the property was built using substandard materials, or the property wasn’t built according to the contract.
According to the IRS, a determination of reasonable cause must be based on an evaluation of all the facts and circumstances on a case-by-case basis. The IRS considers the following factors:
- How long after the end of the first year of the credit period did the owner receive the Forms 8609? How many years has the owner claimed the credit without having the Forms 8609? How did the owner answer question C on Form 8609-A?
- Did the owner encounter other difficulties while noncompliant with the IRC Section 42(l)(1) certification requirement, and how were the problems resolved?
- What reason did the owner give for the delay? To show reasonable cause, the dates and explanations should clearly reflect efforts to resolve noncompliance with IRC Section 42 in a timely manner and expeditiously obtain the Forms 8609 from the state agency.
- Did the owner know, or make reasonable attempts, to determine the IRC Section 42(l)(1) certification requirements? Is the general partner a professional specializing in the development and management of IRC Section 42 properties?
- Did the owner make a mistake? How long was it before the owner corrected the mistake? Generally, errors don’t provide a basis for reasonable cause, but additional facts and circumstances may support such a determination. Forgetfulness, oversight, or reliance upon another person doesn’t support a determination of reasonable cause for failing to make a timely required filing.
- Death, serious illness, or unavoidable absence of the owner may establish reasonable cause. The IRS will consider the relationship of the responsible party to the owner; the dates and duration of the illness or absence; how the event prevented compliance; whether other business obligations were impaired; and whether the noncompliance was remedied within a reasonable period after a death or absence.
Tip #2: Consider Claiming Credits Earlier If Site Is Financed with Tax-Exempt Bonds
Ask the owner whether your site is financed with tax-exempt bonds. Owners of sites financed with tax-exempt bonds may be able to claim credits earlier than if the sites were financed with tax credits. That’s because the way states allocate credits to sites financed with tax-exempt bonds is different from how they allocate credits to tax credit sites without bonds. If you manage a site financed with tax-exempt bonds, tell the owner it should ask its attorney or tax credit consultant what to do.
Tip #3: File Amended Return If Form 8609 Issued After Filing Deadline
The owner of your site may not get the Form 8609 until after it files its tax return for the first year of the credit period. In this case, tell the owner that after your state housing agency issues the Form 8609, the owner should file an amended return to claim any credits missed because it didn’t have the form in time to claim them. This way, the owner doesn’t have to forfeit the credits it couldn’t claim.
For example, say the credit period for XYZ Apartments began in 2015. Suppose the site owner files its 2015 federal tax return by the April 15, 2016, deadline, but the state housing agency doesn’t issue the Form 8609 until May 15, 2016. Because the Form 8609 was issued after the filing deadline, the owner can’t claim any tax credits on its 2015 return. But the owner can file an amended return after it gets the Form 8609 and claim the credits.
In this situation, it may sometimes make more sense for an owner to request an extension to file its tax return instead of amending the return later to claim credits. Tell the owner to talk to its accountant or attorney about this option.
Tip #4: Treat Date First Unit Is ‘Suitable for Occupancy’ as New Building’s PIS Date
Make sure the owner of your site knows how to determine the placed-in-service (PIS) date for a new building or for an existing building that’s now used as residential rental property. The PIS date for these buildings is the date on which the first unit in the building is deemed “suitable for occupancy,” taking into account local health, building, and safety codes. This is typically the date the building’s certificate of occupancy is issued. But the determination is “fact-specific.”
Once a building is placed in service, you must keep it in compliance with the tax credit law. The PIS date also starts the clock for record-keeping purposes. And the date determines the deadline for meeting the minimum set-aside. Owners have until the end of the taxable year following the PIS year to meet the set-aside. Once the owner meets the set-aside, the site becomes eligible for credits. Each building has its own PIS date. So if you have several buildings at your site, each one may have a different PIS date.
The owner doesn’t have to wait until its low-income units are occupied before placing the building in service. All that matters is that the units are suitable for occupancy—they need not actually be occupied.
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