Q&A on Reporting Noncompliance
No matter how efficiently you run your tax credit site, your state housing agency may one day cite you for noncompliance with the tax credit law. If that happens, your state housing agency must notify your site's owner of the violation and also report it to the IRS using IRS Form 8823 (Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition).
As a tax credit manager, it's your job to correct compliance violations, which means you must be familiar with the procedure that your state housing agency follows to report compliance violations it finds at your site. We spoke with tax credit consultant A.J. Johnson to get the answers to six questions that tax credit managers commonly ask about reporting noncompliance. Knowing the answers to these questions will help you bring your site back into compliance and keep the owner's tax credits safe.
Notifying Site About Noncompliance
Q Will our state housing agency notify us of compliance violations it finds?
A Yes. State housing agencies usually discover violations when they inspect sites or when they review files during site visits, says Johnson. If your agency discovers a violation at your site, it must notify the owner of the noncompliance and give you a specific period of time in which to correct it. Most—but not all—violations are correctable. Your agency will send a letter of notification along with any relevant attachments.
Notifying IRS About Noncompliance
Q Will our state housing agency's notice to the owner include a copy of Form 8823?
A Probably not, because your state housing agency most likely would not have filed this form yet. State housing agencies must file Form 8823 with the IRS no more than 45 days after the deadline for correcting a violation (known as the “correction period”). Agencies usually wait until sites have had a chance to correct the noncompliance before filing this form.
At that point, the agency would send the owner a copy of Form 8823. If the noncompliance was corrected, the agency will indicate this on the form (line 9). That way, the IRS will learn up front that you acted diligently in correcting noncompliance.
No Exceptions to Notifying IRS
Q Must our state housing agency report every compliance violation to the IRS?
A Yes. As part of a state housing agency's responsibility for monitoring compliance in its state, the agency must report to the IRS all instances of noncompliance with federal tax requirements—whether or not you've corrected them. Most agencies, if they discover a compliance violation that has already been corrected, will still file Form 8823. In this situation, the agency must file Form 8823, and supply the start and end dates of the noncompliance period on lines 8 and 9. However, owners and managers may avoid a report to the IRS in this case if management found and corrected the error prior to being notified of an upcoming state agency review.
Telling IRS About Corrections
Q Suppose our state housing agency files Form 8823 with the IRS, and then we manage to correct a violation. Must our state housing agency let the IRS know after we've corrected the violation?
A Yes. If you correct a compliance violation after your state housing agency has notified the IRS, the agency must file a new Form 8823. In this case, it must check the box on line 10 that says the filing is “only to show correction of a previously reported noncompliance problem.” This correction must be made within three years of the deadline of the original correction period. If the correction occurs later than this, the state agency is not required to report it as corrected.
Deadline for Correcting Noncompliance
Q Is the length of the correction period the same for every type of noncompliance at every site?
A No. The deadline to correct noncompliance varies by state and usually by the nature of the noncompliance. State housing agencies must give owners a “reasonable period” of time to correct noncompliance—up to 90 days. If you need more time than your agency gives you to correct a violation, and can show “good cause,” you can ask your agency for an extension of up to a total of six months.
Notifying IRS of Different Noncompliance Types
Q Should we expect our state housing agency to use any other forms to report certain types of compliance violations?
A No. State housing agencies must use Form 8823 to report all types of tax credit noncompliance. Line 11 lists most of the ways that a site can fall into noncompliance. If a state housing agency wants to report other types of violations, it must check the box(es) on line 11q to report “other noncompliance issues,” and attach an explanation.
PRACTICAL POINTER: It's a good idea to familiarize yourself with Form 8823, so that you can explain it to the owner if your site gets one. If you don't have a copy, you can view the form at http://www.irs.gov/pub/irs-pdf/f8823.pdf. Visiting this Web site will automatically launch a pdf file of Form 8823 with its instructions. You can then save the form to your computer or print it.
A.J. Johnson: President, A.J. Johnson Consulting Services, Inc.; 3521 Frances Berkeley, Williamsburg, VA 23188; (757) 259-9920; email@example.com.