IRS Releases Updated 8823 Guide, Clarifies Utility Allowance Compliance
In late March, the IRS released an updated version of its Guide for Completing Form 8823: Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition. State housing agencies use Form 8823 to notify the IRS of a site's noncompliance with tax credit requirements. Your state housing agency must also use this form to inform the IRS if you correct noncompliance by the agency's deadline.
According to Grace Robertson, senior analyst with the IRS's low-income housing program, the most important changes have been made to Chapter 18, which discusses utility allowances. The expanded text clarifies that determinations of noncompliance are made when gross rent exceeds the maximum gross rent limit as the result of computational or procedural errors. You can find the guide online from the www.irs.gov page. Enter “Low-Income Housing Credit” in the search engine, and the first result will be the guide.
Utility Allowance Basics
Tax credit regulations limit how much the residents of a particular unit may pay for housing each month. That amount is called the maximum gross rent, and this figure includes both rent and utilities. After you figure the maximum gross rent, you must determine the utility allowance for the unit and subtract it. The result is the maximum monthly rent you can actually charge for that unit. The utility allowance is an estimate of what utilities should cost for that unit. The utility allowance is set either by a housing agency or your local utility company.
Examples of Noncompliance
The changes to the 8823 Audit Guide emphasize the importance of keeping the utility allowance current within the low-income housing program. It is important to do so because once a unit is out of compliance because you inadvertently charged the resident too much rent, the owner forfeits the credits on that unit for the remainder of the calendar year, even if you refund the excess amount charged to the resident.
The following are the expanded examples of errors that may result in noncompliance:
The appropriate utility allowance isn't used. For example, an owner uses a local utility company's estimate for a HUD-regulated building. If your building is only regulated by HUD, you must use the utility allowance issued by your local housing authority on HUD's behalf for all units in the building.
The utility allowance isn't properly calculated. For example, an owner uses a local housing authority schedule to determine the utility allowance for all-electric units, but doesn't include the cost of electric heating. When the cost of electric heating is added to the utility allowance, gross rent exceeds the limit.
Rents aren't updated to reflect revised utility allowance after 90-day period. For example, suppose the maximum gross rent limit is $500, but the owner charges $445 rent and a $50 utility allowance for a total of $495. The utility allowance increases to $60 on April 1, but the owner doesn't adjust the rent. The owner is charging $445 rent and a $60 utility allowance for a total of $505, which exceeds the gross rent limit of $500. The owner is out of compliance beginning July 1 of that year.
Owner is missing documentation. Low-income buildings are also considered out of compliance if the owner cannot establish that the rent charged residents doesn't exceed the gross rent limit. According to the IRS, under the following circumstances, there's a presumption that the rent charged the resident plus the utility allowance will exceed the gross rent limit until otherwise established:
Rents aren't reduced for a utility allowance when utilities are paid directly by the resident to the utility provider, even if the rent charged to the resident is less than the maximum gross rent limit. For example, the gross rent limit is $700. The resident's rent is $575, and the resident pays the utilities directly to the provider. But the owner cannot provide documentation of the utility allowance computation. The noncompliance date should be determined based on the facts and circumstances, such as when the owner ceased using a utility allowance.
The owner didn't review the basis on which the utility allowance is established at least once during both the prior and current calendar year. In other words, the utility allowances are not current. For example, an owner reviewed the utility allowance and determined that the allowance was $100 effective May 1, 2010. The owner was still relying on the $100 utility allowance when the state agency reviewed the owner's compliance in April of 2012. The building is out of compliance because the owner failed to review the utility allowance at least once during calendar year 2011. In this case, the noncompliance date is Dec. 31, 2011.
The owner didn't maintain adequate documentation regarding the computation of utility allowances. Without sufficient proof of the amount of the allowance and how it was estimated, there's no way to correctly compute the rent. For example, an owner reviewed the utility allowance and determined that the utility allowance was $65 for 2010. The allowance was computed by a licensed professional approved by the state agency using an energy consumption model. Upon review by the state agency during a compliance review, the owner presented a one-page letter from the professional. While the utility allowance amount was disclosed in the letter, the letter was not signed or dated. Further, the letter didn't describe the factors considered or the data used. In this case, the state agency could not reasonably determine that the utility allowance was correct. The noncompliance date here would be Dec. 31, 2010.
Grace F. Robertson: LIHC Senior Program Analyst, Internal Revenue Service, 5000 Ellin Rd., Lanham, MD 20706; firstname.lastname@example.org.