Follow Recordkeeping, Retention Requirements to Prove Tax Credit Compliance
You might think that as long as you’re complying with the tax credit program’s requirements, you’re protecting the owner’s credits. But the owner’s credits aren’t safe unless you can prove your compliance to the IRS and your state housing agency. If you don’t have the right documents to show auditors that you’ve complied, your efforts may be in vain.
Tax credit rules require you maintain site records and to provide annual reports to your state monitoring agency. Generally, you must keep two types of documents—those relating to your building’s compliance with the tax credit law during the 15-year compliance period, and those relating to local violation reports and notices. We’ll help you guard against tax credit recapture and noncompliance citations by telling you what documents of each type you must keep and how long to keep them. And because you must keep certain documents for 21 years or even longer, we’ll give you tips on how and where to keep your files so that they—and the owner’s tax credits—stay safe.
Tax Credit Compliance Documents
The tax credit rules require that you keep documents to prove compliance during each year of each building’s 15-year compliance period.
Information required. To comply with the rules, your documents must contain the following information:
- The total number of residential rental units in the building, including the number of bedrooms and square footage of each unit;
- The percentage of low-income units in the building;
- The rent charged for each unit, including the resident portion of the rent, rental subsidy, and utility allowance;
- The number of residents in each low-income unit;
- The number of vacant units in the building at any point in time, and when and to whom next available units were rented;
- Records of the move-in and move-out dates of any market-rate units to verify the available unit rule;
- Information about each household’s annual recertification from third parties, unless your site consists of 100 percent LIHTC units;
- Documentation to support each household’s eligibility to occupy a low-income unit;
- The building’s eligible basis and qualified basis at the end of the first year of the compliance period; and
- The character and use of the nonresidential parts of your building. For example, tenant facilities that are available on a comparable basis to all tenants and for which no separate fee is charged for use of the facilities, or facilities reasonably required by the development.
Documents to keep. The rules don’t specify which documents you must keep or what format you must use to document the required information. But you should keep certain administrative documents and certain household documents that contain the required information. Be sure to check whether your state housing agency has its own procedures for complying with the tax credit recordkeeping rules. Your agency may require you to keep additional documents to the ones below or to organize your documents in a certain way.
> Administrative documents. The administrative documents you should keep include:
- IRS Forms 8609;
- Certificates of occupancy;
- Tax credit allocation documents;
- Owner’s partnership agreement;
- Financing agreements;
- Regulatory agreements (if your building is mixed-program); and
- Extended use agreement with your state housing agency.
> Household documents. The household documents you should keep include:
- Household application;
- Household initial certification form;
- Third-party and other verifications of household income (for certification and each recertification);
- Clarification records (if any);
- Household’s annual recertification (if applicable);
- Household’s initial lease and addenda, including all renewal leases;
- Rent card or receipts showing rent owed and paid;
- Utility allowance data; and
- Unit inspection forms.
How long to keep documents. The length of time you’re required to keep documents relating to tax credit compliance depends on whether they relate to the first year of your tax credit site’s compliance period or a later year.
First-year documents. You must keep all documents related to the first year of your building’s compliance period for at least six years after the due date for filing the owner’s tax return for the 15th year of the site’s compliance period. This means that you must wait at least 21 years before discarding any first-year files.
Second- through 15th-year files. You must keep documents related to the remaining years of your building’s compliance period for at least six years after the due date for filing the owner’s tax return for that year.
Before you start discarding any files, confirm with your state housing agency that it’s okay to do so. Because you probably need to keep your site in compliance during the extended use period (which may extend 15, 30, or more years beyond the compliance period), your state housing agency may require you to keep certain files longer than the IRS requires.
Health, Safety, and Building Violations
The tax credit rules also require you to keep all original local health, safety, and building code violation reports and notices for state housing agency inspection.
How long to keep documents. Keep these documents until you’ve corrected the violation and shown your state housing agency that you’ve corrected it.
Tips on Keeping Documents
It’s important to keep the required documents in a safe place where you can easily locate them when you need them. Otherwise, you may not be able to get your hands on a document to prove your compliance. Here are some practical tips on how and when to keep your documents:
Keep duplicate copies off-site. Although it’s not required, keeping an extra set of all your documents in an off-site location can prove very valuable insurance. If you keep only one copy of your documents at your management office and, for instance, a disgruntled employee steals your documents, or fire consumes them, all of the owner’s tax credits may be in jeopardy.
Use fireproof cabinets to store files. Consider storing your original and duplicate sets of files in fireproof cabinets. Although the tax credit rules don’t require you to use fireproof cabinets, your decision to do so may one day save the owner’s credits.
Keep documents separate and organized. When IRS or state housing agency auditors visit your tax credit site, make sure that all your files are set up exactly the same way. Keep each building’s and each household’s documents separate. Make sure your documents are well organized, presentable, and consistent so that auditors have an easy time reviewing them.
Consider electronic storage, but take precautions. You can save space and money by scanning and storing some or all of your documents electronically. This could prove an efficient way to make a backup copy of your documents. But if you want to create electronic documents to replace your paper originals, check whether your state housing agency will let you do this. Because your agency must audit your documents, it may insist on seeing the original documents when it visits your site. Also, your agency may want assurances that your electronic documents haven’t been altered or tampered with—and will still be viewable in 20 years despite changing technology.