How State Housing Agency Violations Differ from IRS Violations
If you violate the federal tax credit law and don’t promptly correct the noncompliance, the owner may lose tax credits. Item 11 on IRS Form 8823 (Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition), which is the form the state housing agency uses to report noncompliance to the IRS, lists the main ways you can violate the tax credit law. These federal violations are sometimes called IRS violations.
But state housing agencies have the power to create additional rules for compliance. Failure to comply with a state housing agency rule is commonly called a state housing agency violation. Although state housing agencies, which monitor compliance, can issue violations to owners for sites that fail to comply with state as well as federal rules, they lack authority to recapture LIHTC credits. They can, however, sue owners for breach of contract. But in most cases, state housing agencies just report noncompliance with their rules to the IRS, which decides whether it should take back any credits.
Although it has the power to do so, the IRS probably won’t take credits away from owners that fail to correct state housing agency violations, because these violations usually have more to do with the day-to-day operations of a tax credit site and its relationship with the state housing agency than with meeting fundamental compliance requirements of the tax credit law.
For example, a common state housing agency violation is failing to notify your state housing agency when your site changes management. This is important for the practical reason of your state agency needing to communicate with you as it monitors your compliance. While it’s also in your best interest to stay in touch with your state housing agency, failing to correct this violation won’t affect your site’s continued eligibility in the LIHTC program.
What State Housing Agencies Can Do About Noncompliance
If there’s no risk of a site losing tax credits, some managers may be tempted to ignore state housing agency violations. However, as adjudicators of how tax credits are allocated within a state, housing agencies can make it difficult or impossible for an owner to get credits for sites in the future. Agencies could penalize owners for not making reasonable attempts to correct noncompliance with state rules. It could subtract points on an owner’s application for tax credits as a penalty if management hasn’t made a reasonable effort to correct a state housing agency violation. Because applying for tax credits is highly competitive, it could be nearly impossible to overcome such a handicap.
Additional noncompliance measures could include publicizing the site’s status as “Not in Good Standing” on the agency’s website or court action.
Once good faith efforts are demonstrated to the agency’s satisfaction, the agency will reinstate the property, owner, and management company in Good Standing and update its website to reflect the change in status.
Before having to confront a state housing agency violation, call your state housing agency to find out its policy on correcting violations. It helps to know what action your state housing agency is likely to take if you don’t respond to its violations and, most importantly, it’s good practice to take all violations seriously and to stay on good terms with your state housing agency during the 15-year compliance period.