Keeping Your Site in Compliance: Advice from the Experts

Keeping Your Site in Compliance: Advice from the Experts

The tax credit program's requirements are complex, and understanding all of the rules and requirements can be challenging. Even experienced tax credit site staff can make errors from time to time. Mistakes can be costly, though, so we reached out to the compliance experts at several state housing agencies for their advice on a few key areas of compliance.

The tax credit program's requirements are complex, and understanding all of the rules and requirements can be challenging. Even experienced tax credit site staff can make errors from time to time. Mistakes can be costly, though, so we reached out to the compliance experts at several state housing agencies for their advice on a few key areas of compliance.

The following is a collection of their insights and tips to help you stay in compliance. Keep in mind that each state's policies may vary on different topics. It's important to understand the rules of the state in which your site is located.


Dealing with Student Households

In Ohio, we have a lot of properties that combine tax credit with project-based assistance, which brings in another set of rules that site staff need to navigate. The HUD student rule is a completely different animal from the tax credit student rule, and sites often get the exceptions and application of the rules confused.

Managers need to think about which program applies. If it's the tax credit program, then they can imagine that they are wearing a hat with blinders on that allows them to see only the tax credit student rules. And then if HUD rules apply, they take their tax credit hat off and put their HUD hat on. That often helps site staff to keep the rules straight.

Also, remember that the student rule is always in play. When new residents move into a tax credit site, once they are income-qualified for the program, they are, in essence, always qualified for the program, unless they violate their lease. However, under the student rule, if at any time while the household is living at the site, it becomes a household made up of full-time students, it would have to meet one of the five exceptions (see “Five Exemptions to the Student Status Rule”). If it does not, then the unit would be considered a market-rate unit.

At Ohio Housing Finance Agency, in light of the changes brought about by HERA (the Housing and Economic Recovery Act of 2008), which allows for the suspension of recertifications for 100 percent tax credit sites, and to be consistent with the IRS's wishes, we require 100 percent sites to obtain a student status certification annually on all households.

The key to managing the student rule is education on both parts—not only training the staff who are overseeing the sites, but also educating the residents about the rule. The program is not set up to make people fail or keep people from trying to better themselves. They just need to understand what the rules are, and which rules are in play.

—Christine Bennett,Ohio Housing Finance Agency

There is no exception that states that students enrolled in online education are exempt from the full-time student status rule. Therefore, if the online institution considers the student to be enrolled full time, he must be considered a full-time student for determining tax credit eligibility.

When implementing the student status rule, remember that anytime a household claims one of the five exemptions, management must properly verify that the household does, in fact, meet that exemption.

Similarly, if a household does not invoke the full-time student rule because one or more members are only part-time students, management must verify with the educational institution that those individuals are, in fact, enrolled on only a part-time basis. An important distinction here is that “part time” is defined by the school attended. Too often, we see management companies fail to clarify the school's definition of full time vs. part time and then make an assumption that may not hold true.

—Matt Rayburn,Indiana Housing & Community Development Authority

EDITOR'S NOTE:For more guidance on the student rule, see “Stay on Top of Student Status to Avoid Tax Credit Loss,” Insider, February 2011, p. 1.

Changes to Household Composition

I attend a conference each January in Washington, D.C., that is hosted by the National Council of State Housing Agencies. This conference provides the opportunity for state agency reps to unite and discuss issues or concerns taking place within the LIHTC industry, and to try to determine how best to handle them. Adding household members was one of the topics that came up a few years back. States were finding that, in many cases, because the LIHTC program requires strict compliance within the first six months, applicants were moving in (oftentimes without their “other halves”), and then trying to add their girlfriends or boyfriends two months later. This was their intent all along, but, of course, the underlying reason that all household members didn't move in at the same time was that the combined household income would have exceeded the maximum income limit allowed. Applicants were trying to skirt the income limit restrictions quite frequently (word spreads) in many states, Oregon being one of them.

The general consensus among most states was to enforce the policy that no additions would be made (other than the birth or adoption of a child) until after the initial six-month lease term had been fulfilled. Some states have established a more restrictive approach by mandating that no additions be made to any household until after the initial 12-month period has been exhausted. Oregon Housing & Community Services felt that approach was too conservative, but that adhering to the shorter term was quite reasonable.

—Tonya Evans,Oregon Housing & Community Services

If an income-qualified person moves into a unit and “soon thereafter” a second tenant joins the household, putting the household over the income limit, the unit is out of compliance as of the original tenant's move-in date. The IRS, to date, has not defined “soon thereafter.”

To remove the ambiguity this provision has created, Idaho Housing and Finance Association has made the determination that a change in household composition that occurs within the first six months of tenancy is deemed to be “soon thereafter.” The new/changed household must requalify for the unit as of the date of original move-in. If the original move-in occurred prior to the published income limits, and the new tenant moves in after the new income limits, the household must requalify at the old income limit rates. In other words, the new/changed household must qualify under the income limits that were in place at the date of original move-in.

—Becky Miller,Idaho Housing and Finance Association

Household files need to accurately report not only a change in household composition, but also provide a specific day when a change occurred.

—David White,Alaska Housing Finance Corporation

Applying the Next-Available Unit Rule

Correctly following the next-available unit rule can be confusing. However, the answer is not to evict or non-renew households once their recertification reveals they are over 140 percent [of the income limit]. This is not good-cause for termination of tenancy. At 100 percent tax credit projects, keep the unit rent-restricted and allow the household to stay until they choose to vacate. At projects with market-rate units, keep the unit rent-restricted until the building's applicable fraction is properly restored and then convert the unit to market rate.

The best possible tool for complying with the next available unit rule is to create a good tracking system so that management always knows which units in a particular building are above 140 percent and to list all vacancies and move-ins that occur after the household becomes over-income.

—Matt Rayburn,Indiana Housing & Community Development Authority

Identifying and Verifying Assets

This has become an area of focus in the past year or two. There are several issues we are encountering in North Carolina. A relatively “new” asset has emerged on the scene. Most governmental programs, such as Social Security and unemployment, are paying benefits on a debit card rather than sending checks to recipients. If the household has funds available on the debit card, this is an asset much the same as if the funds were deposited into their checking account. While debit cards are not specifically mentioned as assets in the HUD Handbook 4350.3 or the 8823 Guide, we treat the balance on the card as such. We recommend that management companies ask about the debit card when households say they receive this type of benefit, but don't disclose a bank account that could be used for direct deposit of benefits.

Another common error we see is including the sale of a home as an asset disposed of for less than fair market value (FMV) because of the decline in the real estate market. If a home was valued at $150,000 three years ago, and the family sold it this year for $75,000 because that was the most they could get for the home on the open market, there is no asset disposed of for less than FMV, provided that the home was not purchased by a relative. FMV is what the home is worth on the open market—that is, the price a willing buyer and a motivated seller agree on. The fact that the home was once valued at a much higher price is immaterial.

Finally, banks are becoming notorious for charging excessive fees to verify bank accounts. In North Carolina, we do not want the property or the household to pay for verifications. Therefore, it is common to see bank statements in a tenant file. The caution here is to make sure that you see a complete, unaltered original document and make copies of the entire statement for the file. Many banks do not provide a summary of all accounts on the first page. Without this summary, the only way to verify that you have accounted for all of the accounts is to have all the pages. Also, bank statements are the best way to catch unreported income by looking for recurring deposits from a source that has not been disclosed.

—Susan M. Westbrook,North Carolina Housing Finance Agency

When we conduct reviews, we have found that there seems to be a lot of confusion about assets and whether they need to be third-party verified. We deal with many sites that have households that do not have large amounts of assets. While the Internal Revenue Code does allow for self-certification in households whose assets total less than $5,000, if there are other sources of financing on that site, such as project-based assistance or HOME, those programs do not recognize a self-certification for assets, so those assets would have to be third-party verified.

In Ohio, we have a required Sworn Income and Asset Statement form that is highly effective because it allows the residents and any household member over the age of 18 to identify, on an individual basis, his sources of income and assets. It allows us to capture better information as to the items that we need to verify. The form has been borrowed by several other states for use at their projects, and is available on our Web site (

A final note about verification: For tax credit sites that have project-based Section 8 and have to use HUD's EIV system, keep in mind that the EIV system is only to be used for HUD programs. EIV data cannot be used to verify household income for the tax credit certification process. HUD is very serious about that, and there are penalties and possible imprisonment for unauthorized EIV use.

—Christine Bennett,Ohio Housing Finance Agency

We still find instances where due diligence is not being done when obtaining verification of income and assets. There are instances of incomplete third-party verifications without any follow up from the owner. Or owners are unable to obtain written third-party verification and go right to a review of resident-supplied documents without attempting a phone call to the third-party source. And sometimes the owner or agent follows the appropriate steps for obtaining verification, but does not properly document that in the file. In these cases, we find that those with verification checklists and clarification forms tend to avoid errors when it comes to documenting third-party verification, or lack thereof.

—Melanie Toscano,New Hampshire Housing

Calculating Rents

When calculating the gross rent for a unit for purposes of checking against the applicable rent limit, make sure to include any extra non-optional fees. It seems that almost everyone correctly understands to add tenant-paid rent to the utility allowance. We are now seeing more and more properties that are enforcing various non-optional fees, but forgetting to include these in the gross rent calculation. Common examples include mandatory renter's insurance and fees for month-to-month tenancy. Our advice is generally not to charge these fees at all, but if you are determined to do so, make sure to include them in the gross rent calculation and clearly list all extra charges on the lease and Tenant Income Certification.

—Matt Rayburn,Indiana Housing & Community Development Authority

To avoid rent calculation errors and possible 8823s from your state agency, owners and agents must remember to calculate rent increases with the knowledge of a change in utility allowance. Both the rental amount and the utility allowance together cannot surpass the maximum rent limit for a unit size. When an overage is discovered, owners must reimburse the resident the difference. Please note that it is also crucial to know the maximum rent prior to a rent increase. Maximum rents are usually released in the spring and can be found on most state Web sites.

—Becky Miller,Idaho Housing and Finance Association

Applying Utility Allowances

Using the public housing authority's (PHA's) utility allowance should be one of the easier methods since the chart is created for you. However, the danger is that the PHA may not provide notice when it releases new allowances and/or may not release them regularly. Managers of Section 42 properties must understand that it is not the responsibility of the PHA to contact them with updates. Rather, managers must be proactive in checking periodically for updates to utility allowances. When new allowances are released, they must be implemented within 90 days of the effective date, not 90 days from the date that you find them. Therefore, it is important to be vigilant and check in frequently with your local PHA if you choose to use this utility allowance source.

—Matt Rayburn,Indiana Housing & Community Development Authority

For properties that have chosen the option of annually certifying a development's utility allowance as opposed to using the local public housing authority's allowance, management needs to be cognizant of the specific reporting requirements needed by the monitoring agency, and must be diligent in providing accurate data that can be easily interpreted by the monitor. Too often, data provided does not correlate, includes inaccuracies, or does not follow the allowed program specifics.

—David White,Alaska Housing Finance Corporation

Vacant Unit Rule

As per the IRS revised 8823 Guide, if an owner has a vacancy rate with a large number of empty units not suitable for occupancy, they are considered in noncompliance. “Not suitable for occupancy” can be defined as not rent ready within 30 days.

Example: A resident moved out of Unit #201 on March 1, 2010. Compliance auditors discover during an annual inspection on Aug. 1, 2010, that Unit #201 is not rent ready or suitable for occupancy—that is, the unit is still under rehabilitation (missing carpet, appliances are not in place, painting has not been started). Because of the long vacancy, an IRS Form 8823 would be filed and the unit considered in noncompliance until the owner returns the unit to rent-ready status.

—Becky Miller, Idaho Housing and Finance Association

Lease Terminations

Not everyone has gotten the news that it is okay to refuse to renew a household’s lease at the end of the lease term. In Revenue Ruling 2004-82, the IRS published guidance that concluded that owners are prohibited from evicting a household or terminating tenancy other than for “good cause.” When this guidance came out, many practitioners interpreted that refusing to renew the lease must also be for good cause. This made it virtually impossible to remove a noncompliant, full-time student household because few magistrates consider being a student “good cause” for eviction, regardless of program requirements. The 8823 Guide indicates that a lease is a contract and the owner is not obligated to renew the lease. Failure to renew the lease does not constitute an eviction without good cause.

Susan M. Westbrook, North Carolina Housing Finance Agency

Physical Inspections

Onsite management staff should be engaged in all inspections and prepared to correct issues as they are found. This practice will not eliminate a possible IRS Form 8823, but may very well reduce the amount of time that a unit/development would be found out of compliance for item 11c. Maintenance staff should be “armed” with general parts (batteries, sink and drain parts, etc.) that can be used to make corrections on the spot. It would also be prudent for management and maintenance staff to review a prior year’s state agency or REAC inspection report to understand what was found in previous inspections.

David White, Alaska Housing Finance Corporation

The most common physical inspection violations that we cite are inoperable emergency lighting, call-for-aid device not functioning as designed, and blocked/unusable emergency/fire exits. For emergency lighting, we recommend that owners/agents test their systems regularly and do a walk-through of the site shortly before the physical inspection to ensure that all systems are working properly. The call-for-aid and egress items are typically a matter of resident education. Often when these are pointed out to the residents, they state that they were not aware there was an issue. We recommend that the requirements be included as part of the move-in procedure and be explained during the move-in inspection. When residents understand why the requirements are in place, they are more likely to comply.

Melanie Toscano, New Hampshire Housing

Tenant Certification

Pursuant to the 8823 Guide, all adult household members must sign and date all documents, including the Tenant Income Certification, or TIC. Owners and managers must ensure that TICs are thoroughly and accurately complete, and that all required signatures have been obtained. Incomplete or inaccurate TICs will represent an event of noncompliance. Common errors regarding the TIC are as follows: incorrect effective and move-in dates, incomplete Section 8 rental assistance information, incomplete HOME program units, incorrect income and rent limits, and Building Identification Number inaccuracies. Inaccurate TICs are considered IRS-reportable issues.

Becky Miller, Idaho Housing and Finance Association

Household File Reviews

Do not use whiteout or markers to obliterate information in household files. If there is erroneous information on a form, have the residents sign and correct the document and/or complete a separate clarification document to explain the discrepancies.

Develop a consistent file order for your property and stick to it! Nothing makes an auditor happier than knowing what to expect in a file and where to find each piece of documentation.

Matt Rayburn, Indiana Housing & Community Development Authority

We cannot stress enough the importance of having a second set of eyes review every household file, particularly those of move-ins. It is so easy to overlook the obvious when you work with a file. Often, another person can pick up the file and easily spot discrepancies or incomplete documentation because it is the first time she has seen it. You do not want the state agency to be your second set of eyes, because when we spot the error, we have to report the noncompliance.

Susan M. Westbrook, North Carolina Housing Finance Agency

We encourage our resident managers and our site staff to review their files from time to time, and have a second set of eyes look at the files to capture items that are either incorrect or missing. This seems to be well in accordance with the IRS’s establishment of the “bright line” date in the 8823 Guide. That is, if owners or managers find and correct noncompliance issues before we notify them of an upcoming review, we cannot issue an 8823 solely on that item.

Christine Bennett, Ohio Housing Finance Agency

Unit Transfers

This is another area where we are seeing problems. A household may transfer to another unit in the same building without any issues. If the “property” is 100 percent low income, the household can also transfer to a unit in another building without issue. If the “property” has market units, the household can transfer to another building only if the household income is below 140 percent of the current income limit. Sounds easy, right? But you have to understand how a “property” is defined.

On the Form 8609, the owner makes an irrevocable election as to whether each building is part of a multiple- building project. If the owner selects “No,” then each building must be treated as a standalone project, meaning the household must move out of one building and move into the new building; transfers are not allowed.

Further, the household must requalify at the time of the move. Household income must be below the current income limit, and the household must be income-certified as a new household. If household income is above the current limit, the move is not allowed under tax credit rules. This is one reason we encourage owners to select that each building is part of a multiple-building set-aside. It allows management more flexibility to handle transfers requested as reasonable accommodations, as well as transfers in general.

Susan M. Westbrook, North Carolina Housing Finance Agency

Read the IRS 8823 Guide and HUD Handbook

Low-income housing tax credit sites that Alaska Housing Finance Corporation (AHFC) monitors are oftentimes managed or owned by entities outside of the state. Although the guide is not necessarily to be used as an “authority for setting or sustaining a technical position,” AHFC has found that with the introduction of the IRS’s “Guide to Completing Form 8823: Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition,” a great many of the issues and concerns that we as the state monitoring agency for the LIHTC program previously debated with development owners and managers from other states have been clarified.

This guide has provided AHFC with what we would deem as a benefit in maintaining compliance on a “level playing field” for those on both sides of the program. This is not to say that there are not conflicts with issues particular to the State of Alaska, but it certainly leads the way to resolving such conflicts when combined with other program publications. Having a working understanding of the IRS 8823 Guide will go a long way in maintaining and assuring program compliance. Owners, and particularly development management, should have a thorough knowledge of the guide, IRC Section 42 in general, and the HUD Handbook.

Numerous developments that AHFC monitors also include HUD’s HOME program. Similar to the 8823 Guide, HUD has developed the guide, “Compliance in HOME Rental Projects: A Guide for Property Owners.” When both programs are combined into one development, it is essential that owners and managers have a complete understanding of the details, nuances, and restrictions of both programs in order to avoid program conflicts and to maintain compliance. Both guides should become a desktop fixture for anyone involved with either program.

David White, Alaska Housing Finance Corporation

Find a Story to Focus On

I absolutely love the tax credit program with all of its complexities and rules. While I realize that not everybody has the passion for it that I do, it is an excellent program and it has accomplished a great deal.

One of the things that I tell my training attendees is that you need to have a story to focus on. I have a story about a resident who I became friendly with when I worked in the private sector. She was at a major crossroads in her life when she moved into a tax credit site. She was retired, her husband had died, her children were grown and on their own, and many of her friends had passed away. After moving into that site, she began to thrive—she found a new calling and made new friends. It was wonderful to see her blossom again. Although that was 11 years ago, when I have a bad day, I think about her story and how the tax credit program helped her to succeed.

Christine Bennett, Ohio Housing Finance Agency

Insider Sources

Christine Bennett: Compliance Coordinator, Ohio Housing Finance Agency;;

Tonya Evans: LIHTC Compliance Technical Advisor, Oregon Housing and Community Services; (971) 673-7185;;

Becky Miller: Housing Compliance Auditor, Idaho Housing and Finance Association;

Matt Rayburn: Multi-Family Monitor, Indiana Housing & Community Development Authority; (317) 233-9564;;

Melanie Toscano: Portfolio Manager, New Hampshire Housing;

Susan M. Westbrook: Supervisor of Rental Compliance Operations; North Carolina Housing Finance Agency;sewestbrook@nchfa. com;

David White: Officer, Alaska Housing Finance Corporation;dawhite@;


Five Exemptions to the Student Status Rule

The IRS has established five exceptions to the student status rule. You may continue to treat the unit as low income if:

  • At least one member of the household receives assistance under Title IV of the Social Security Act (AFDC, TANF).
  • At least one member of the household is currently enrolled in a job training program receiving assistance under the Work Force Investment Act (WIA; formerly the Job Training Partnership Act), or under another similar federal, state, or local program.
  • The household consists of a single parent(s) with a minor child(ren), and both the parent and child(ren) are not dependents of a third party.
  • All members of the household are married and have filed or are entitled to file a joint tax return.
  • At least one member of the household has exited the foster care system.