IRS Newsletter Discusses HUD Handbook Updates
HUD posted Change 4 to HUD Handbook 4350.3, REV-1, “Occupancy Requirements of Subsidized Multifamily Housing Programs,” in August 2013. Change 4 was the first formal change to the Handbook since 2009. And every chapter of the Handbook other than Chapter 2 was affected by Change 4. However, only a portion of the changes apply to the compliance requirements of the Low-Income Housing Tax Credit (LIHTC) program.
Although the Handbook contains nine chapters, tax credit site owners follow only certain rules from parts of Chapters 2, 3, and 5. Under Chapter 5, which covers determining income and calculating rent, Sections 1 and 3 set out the rules you must follow for calculating and verifying income. In its LIHC Newsletter #54, issued in December 2013, the Internal Revenue Service discusses Chapter 5-related income qualifications for LIHTC sites. These topics include third-party verification, state agency requirements, and other LIHTC program requirements.
Income Documentation—IRC Section 42 Requirements
The LIHC #54 points out that while the documentation requirements described in the Handbook are sufficient for IRC Section 42 purposes, Handbook 4350.3, Chapter 3, Section 3, Verification, is not the authority for documentation requirements.
Income certifications. In general, under IRC Section 6001, all taxpayers are held to a documentation standard of “sufficiency.” Treasury Regulation Section 1.6001-1 states that a taxpayer must keep permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by the taxpayer in any return of such tax or information.
Specific to determining whether a household is income qualified, Treasury Regulation Section 1.42-5(b) requires that the taxpayer maintain the income certification for each low-income resident completed at the time the household moved into the unit and, if required, annual income recertifications; as well as documentation to support each low-income resident’s income certification—for example, a copy of the resident’s federal income tax return, W-2 forms, or verifications of income from third parties such as employers or state agencies paying unemployment compensation.
In the case of a resident who’s receiving housing assistance payments under Section 8, the documentation requirement is satisfied if the public housing authority provides a statement to the site owner declaring that the resident’s income doesn’t exceed the applicable income limit under IRC Section 42(g).
Record retention. Owners must maintain records such as the income certifications and documentation for a specific tax year for at least six years after the due date (with extensions) for filing the federal income tax return for that year.
The records for the first year of the credit period must be retained for at least six years beyond the due date (with extensions) for filing the federal income tax return for the last year of the compliance period of the building.
Third-party verification. A document generated by a third-party source but provided by the resident, such as pay stubs or a W-2 prepared by the resident’s employer, is considered “third-party” verification because the document originated from a third-party source. With Change 4, HUD has removed the old verification guidance, which required owners to first attempt to obtain written verification from the source, then wait 14 days for a response, and then document that action in the tenant file before choosing to review documents or use other verification. Under Change 4, third-party verification includes: (1) written verification directly from the source; (2) review of original documents from the source, but provided by the resident; (3) electronic verification; and (4) oral verification.
> Evaluating third-party documents. When evaluating these types of documents, owners are to consider the following questions:
- Is it current? The resident’s circumstances may have changed since the document was created.
- Is it complete? For example, pay stubs can be used to verify income. Actual paychecks (or copies) are not acceptable because deductions are not identified on the paycheck.
- Is it the original document? If the document is a copy, it may have been altered by using high-quality copying equipment. Documents with original signatures are the most reliable.
> Written documents. For written documents received by fax, the fax should include the company name and fax number of the third party. If received by email, the email address should be for the third party and include the name of the party sending the email.
> Internet. Information verified on the Internet is considered third-party verification if the information is from a reliable source. A printout from the Internet is adequate verification.
> Telephone verification. For third-party verification made over the telephone, it’s best to call the verification source rather than accepting verification from a third party initiating the telephone call, to ensure that the person on the telephone is the right party.
State agency requirements. State housing agencies can require taxpayers to obtain specific documentation of income based on local practices and circumstances. LIHC #54 advises owners to consult with the state housing agency regarding documentation requirements for income certifications.
Deferred VA Benefits
HUD added the following language to the Handbook: “For Section 8 tenants only, any deferred Department of Veterans Affairs (VA) disability benefits that are received in a lump sum or in prospective monthly amounts are excluded from annual income” [HUD Handbook 4350.3, par. 5-6(Q)(3)]. The income exclusion for deferred VA disability benefits applies only to tenants receiving Section 8 assistance.
This income exclusion is similar to the existing exclusion for deferred periodic amounts from Supplemental Security Income (SSI) and Social Security benefits. Although the full amount of periodic Social Security payments is included in annual income, the deferred amount resulting from the delayed start of the periodic payment is not included in annual income. In the same way, the full amount of periodic VA disability benefit payments will continue to be included in annual income, but the deferred amount resulting from the delayed start of the disability payments will not be included in annual income.
Individual Retirement Accounts
LIHC #54 discusses how income from IRAs should be treated once someone begins receiving periodic payments, even if it’s just one payment per year. Past versions of the Handbook were unclear as they related to investment and retirement accounts, and many site owners felt certain accounts had to be treated as both a source of income as well as an asset on the certification form for the household. Before the latest revision, Chapter 5, paragraph 5-6(L)(2), read: “Withdrawals from retirement accounts such as Individual Retirement Accounts and 401K accounts that are not periodic payments are not counted in annual income,” and “Balances held in retirement accounts are counted as assets even though withdrawal would result in a penalty” [Handbook 4350.3, par. 5-7 (G)(4)(b)].
Now, paragraph 5-6(L)(2)(d) clarifies that IRA, Keogh, and similar retirement savings accounts are counted as assets, even though withdrawal would result in a penalty, unless benefits are being received through period payments. Therefore, IRS, Keogh, and similar retirement savings accounts are not considered assets if the person is receiving periodic payments. If the resident is receiving periodic payments, the account should be listed as income on the certification form. You no longer treat this as an asset. If the resident is not receiving periodic payments but has access to the balance in the account, treat this as an asset. And if the resident can’t access the balance in the account and no periodic payments are taken, this counts as neither income nor an asset.