How to Fix Four Initial Certification Mistakes
When performing the initial certification for a low-income household at your tax credit site, it’s easy to make mistakes. These mistakes can jeopardize the owner’s tax credits if your state housing agency finds them during an audit.
Fortunately, if you discover certain mistakes after you’ve signed the lease with a low-income household, it’s not too late to fix them. For example, in the guide for completing Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition, the IRS states, “Noncompliance issues identified and corrected by the owner prior to notification of an upcoming compliance review or inspection by the state agency need not be reported; i.e., the owner is in compliance at the time of the state agency’s inspection and/or tenant file review.” In other words, state housing agencies don’t have to report noncompliance for mistakes that managers already discovered and fixed.
Review your households’ initial certifications to check whether you or a staff member made any of the following common mistakes tax credit managers make when certifying their households. If you spot mistakes, follow our tips to fix them as soon as possible.
Mistake #1: Missing or Incomplete Documentation
When your state housing agency audits your site, it will review your household files to make sure you properly certified households as qualified to occupy a low-income unit. If certain documents are missing from the files or if documents are incomplete, it will be difficult to prove that your households are qualified, which means you’re putting the owner’s tax credits at risk.
For example, a household’s file might be missing a form to verify the value of that household’s bank accounts. And managers often forget to get certification forms signed and dated. A missing signature is a red flag for auditors because it gives the impression that management completed the form without showing it to the household.
How to fix. If your files are missing needed documentation, contact the household’s employers, banks, and other verification sources to get it. If the sources can’t give you the documentation or won’t cooperate, write a memo to the household file describing your efforts. For instance, say in your memo that you contacted the household’s bank to verify the amount it had in a savings account six years ago and the bank told you it didn’t keep records that far back. Include the name of the bank employee you spoke to and the dates of your phone calls or correspondence. For more information on drafting a memo to document your efforts, see “Document Efforts to Fix Three Common Household File Mistakes Before You’re Audited,” available at www.TaxCreditHousingInsider.com.
If you can’t get the proper third-party verification, try to get the documentation from the household. For example, ask the household head to get you a certified copy of her tax return for the year in question. Households can get a certified copy of their returns from the IRS by submitting IRS Form 4506 or calling 1-800-908-9946. There’s a good chance the tax return will give you the information you need to complete many of the forms.
If your certification forms are missing signatures, get households or the proper third parties to sign them. Also keep in mind that signatures on affidavits must be notarized. For instance, the tax credit law lets you accept an affidavit from a household swearing that the value of its assets is $5,000 or less (rather than verify the amount of each asset). If your review of initial certification documents shows that a household signed this affidavit, check that the signature was notarized. If it wasn’t, have the household sign the affidavit again with a notary public present.
The IRS record retention regulations require you to keep a household’s files for at least six years after the due date for filing the owner’s tax return for any given year. And if a household’s initial certification took place in the first year of your tax credit site’s compliance period, you must hold on to that household’s files for at least six years after the due date for filing the owner’s tax return for the 15th year of the compliance period. That’s at least 21 years. However, your state housing agency may require you to keep household files for even longer.
Mistake #2: Ineligible Student Household at Move-In
Sometimes tax credit managers don’t check during a household’s initial certification whether the household would be considered an ineligible student household. To prevent tax credit sites from being used as student dormitories, owners and managers must comply with the “student rule” when renting to households. In general, this rule makes a household ineligible to occupy a low-income unit if all of its members are full-time students—even if its income meets the tax credit program’s eligibility requirements.
A person is a student if she has been a student for any part of five months of the current calendar year or the 12 months following the effective date of the certification. The months need not be consecutive or complete. Just one day of the month equals the whole month for student status purposes.
The determination of student status as full or part time should be based on the criteria used by the educational institution the student is attending. An educational organization, as defined by IRC §170(b)(1)(A)(ii), is one that normally maintains a regular faculty and curriculum, and normally has an enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The term “educational organization” includes elementary schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. It does not include on-the-job training courses.
There are several identifiers that could indicate a person meets the LIHTC definition of a student though she may not consider herself a student. Look for signs on the application: no rental history; job that’s brand new in May or June with no previous employment; dates of residence for previous address are August–May.
If your site isn’t required to perform annual certifications, don’t forget to verify student status annually. For 100 percent LIHTC sites, once a household is income eligible it’s always income eligible, but the same isn’t true of student status.
But a low-income household that consists only of full-time students is still eligible under the rule if it fits into one of the following exceptions:
> Exceptions for unit occupied by an individual who is:
- A student receiving assistance under Title IV of the Social Security Act;
- A student who was previously under the care and placement responsibility of the state agency responsible for administering a plan under part B or part E of title IV of the Social Security Act; or
- A student enrolled in a job training program receiving assistance under the Job Training Partnership Act or under other similar federal, state, or local laws.
> Exceptions for unit occupied entirely by full-time students if such students are:
- Single parents and their children and such parents are not dependents of another individual and such children are not dependents of another individual other than a parent of such children; or
- Married and file a joint return.
How to fix. If you mistakenly rented to a household that’s ineligible under the student rule, you must do whatever you can to get the household out of the unit. You probably can’t evict the household because of your error, but you must look for alternatives. Hopefully, the lease you sign with low-income households has a clause that gives you the right to transfer any household that becomes ineligible under the student rule to another unit, raise its rent to market rate, refuse to renew its lease, or end the lease in the middle of the lease term. For an example of this type of clause, see “Use Lease Clause When Households Violate Student Rule Mid-Lease,” available at www.TaxCreditHousingInsider.com.
If you don’t have such a clause and the lease term is near its end, you may be able to give the ineligible household a nonrenewal notice a month or two in advance and then find an eligible household for that unit. Talk to your attorney if you’re not sure of the procedure for lease nonrenewal in your state or municipality.
If the lease term still has many months left, try to transfer the ineligible household to a market-rate unit at your site. Keep in mind that you’ll need to continue charging the household the current tax credit rent for the rest of the lease term. As an incentive to get the household to move, offer a more attractive unit—for instance, one that has a better view or one that’s in a more convenient location. Although it means a revenue loss, the loss is very small compared to the amount of tax credits you’ll save by transferring the household to a market-rate unit.
Mistake #3: Miscalculated Household Income
Tax credit managers often miscalculate household income. For example, you might overlook a HUD Handbook rule when calculating income, or make a math error. Even a small mistake can lead to big problems.
How to fix. Correct any mistakes you find in your income calculations immediately. If, after recalculating a household’s income, you determine that a household’s income was still below the limits, it’s not a big problem. This means that the household was qualified and the owner had the right to claim credits for the unit. But your state housing agency may still cite you for noncompliance for having an incorrect household certification. So be sure to change your forms to reflect the correct calculations.
If you determine that a mistake led you to rent a low-income unit to a household that’s not income-eligible, your site owner can’t claim credits for that unit as long as the household remains in it. So take the same approach as you would with an ineligible student household and do whatever you can to transfer the household to a market-rate unit. Then rent the low-income unit to an eligible household.
Mistake #4: Miscalculated Tax Credit Rent
Tax credit managers sometimes miscalculate the rent they charge their low-income households. For instance, a staff member might use income limits that aren’t current or that apply to the wrong geographic area or household size. Or a staff member might make a math error when adding a household’s utility allowance. If a mistake caused you to overcharge a household, it’s unfair to the household and it could bring your site into noncompliance. If a mistake caused you to charge a household less than you could have, the owner’s tax credits won’t be at risk. But you’re unnecessarily losing rent revenue.
How to fix. There are steps you can take if you discover that you miscalculated a low-income household’s rent. If you overcharged a household, amend the lease and start charging the correct rent immediately. Then, calculate the overage—that is, the amount of rent the household was overcharged—and refund this amount to the household.
If you discover that you’ve been charging the household less than the tax credit law allows, you can’t raise the household’s rent mid-lease because of your mistake. But you should make a note to raise the rent to the correct amount at the household’s next lease renewal.