Take Four Steps if Household Members Claim Zero Income
Occasionally a household member will tell you that she has no income in order to reduce the household's total income and qualify it for the unit. Or a tax credit household that's also subject to Section 8 subsidies may claim that the entire household has no income so as to reduce the portion of the rent that the household must pay. “Dealing with zero-income families is one of the most common complaints of managers of affordable housing projects, especially those with rental assistance,” says tax credit consultant A.J. Johnson.
According to IRS rules, it's up to you to properly verify the income claims of each household. Your state agency auditors will immediately look for proper verification in your files whenever they see household members who claim no income. If you don't show the auditors how you verified these claims, they'll report the owner to the IRS for noncompliance, and this could threaten the tax credits on the site.
To help you satisfy tax credit rules, we'll tell you about four simple steps, you can take when household members claim they have no income. By taking these steps, you may get them to remember or admit to income sources that they hadn't told you about. And even if household members continue to claim that they have no income, you can show your state housing agency and the IRS that you're making an effort to fight abuse at your site.
TAKE FOUR STEPS TO VERIFY ZERO-INCOME STATUS
If households or household members say they get no income from any source, be skeptical, say the experts. “One of the most frustrating scenarios for managers is the applicant who insists he has no income and there's no factual basis on which to refute that claim,” says Johnson. For example, a family may report no income, but they have an active utility or phone service account, a credit report that shows they are current on loans, or simply, that their lifestyle is incompatible with having no income.
To avoid problems with your state housing agency, take the following four steps to verify the claim:
Step #1: Show Household Members HUD's List of Income Sources
There are some instances in which a member may have a valid no-income claim. Households may have a zero-income certification due to excluded income, or some families may have zero income for temporary periods.
However, you need to verify each claim and make sure the applicant or member has a clear understanding of what constitutes income. “Applicants often report no income because they don't understand the HUD definition of income,” says Johnson. For instance, they may think it means only wages and not other types of income, such as government benefits.
To help you avoid this type of honest mistake, show household members a list of what constitutes income for tax credit households. You can use Exhibit 5-1 of HUD Handbook 4350.3, which the IRS tells owners to use to determine household income. In this exhibit, HUD lists sources of money that count as income and sources that don't.
If household members say they have no income when they meet with you for a certification or recertification, ask them to look carefully at HUD's list of income sources. Remind them that even if they don't get money from a job, money from the government in the form of Social Security or welfare benefits is considered income. In response, household members may admit that they get benefit payments from the government and didn't realize these payments counted as income. Or they may explain that they get money that HUD doesn't count as income, such as payments for foster children. Or they may continue to claim they have no income.
Step #2: Ask Members How They Plan to Make Ends Meet
Household members still have to subsist from day to day. If household members claim no income whatsoever, they won't be able to pay for daily expenses such as food or transportation. If, after looking over HUD's list of income sources, they still say they have no income, ask them how they plan to survive at the site. Asking this may help you smoke out a dishonest household that's intentionally hiding income from you. Household members may suddenly “remember” having income.
But some household members will continue to claim that they don't have income. For example, they might say that they get handouts now and then from friends or relatives. At this point, Johnson recommends performing a current expense analysis in a spreadsheet. This requires that a household list all current expenses, determine the status of each expense, and compare these figures to the amount of income reported. “If the expenses are currently paid, this conflicts with the household's claim of zero income,” says Johnson. Seek clarification if this occurs.
Step #3: Send Verification Forms to Government Agencies
If household members continue to say they have no income, tell them it's your policy to verify that they don't get any payments from government agencies. Tell them that you're going to verify their no-income claim with several government agencies that pay benefits, such as the Social Security Administration and the state and local agencies that pay unemployment and welfare benefits. You can use the form you normally use to verify government benefit income. Make a list of the most common sources of government payments and use the list for any adult household member that claims no income. And be sure to contact your state housing agency to find out whether it has its own requirements for tracking down income from government sources.
Avoiding discrimination claims. To avoid discrimination claims, make sure you send verification forms to all of the agencies on your list for each member of a household that claims no income. Don't pick and choose which agencies to send the forms to based on your impressions of particular household members.
Handling agencies' responses. If agencies respond that they pay benefits to household members who claim they have no income, tell the household members. Inform them that you must count the benefits in their income to determine the entire household's eligibility. If a member claims that an agency gave you the wrong information, tell her to contact the agency to correct the mistake.
If agencies respond that they don't pay benefits to household members, you can certify that the household members have no income. But remind the members that they must tell you if they begin getting income as defined in the HUD Handbook. And of course, ask them at each recertification if they've begun receiving income.
Step #4: Require Household Members to Sign Affidavit
To complete your certification for household members who claim no income, require that household members fill out an affidavit certifying that they aren't employed and have no income from any sources listed in HUD Handbook 4350.3, Exhibit 5-1. This statement should be made under penalty of perjury. You can use our Model Form_Require Member to Sign Zero-Income Affidavit.
According to Steven McDonald, vice president of Westlake Realty, having members sign the form “usually gets them to admit to having a family member providing support or a large chunk of money in the bank that is used to pay rent and other living expenses.”
If you certify a household in which one or all of its adult members claim to have no income, remember to keep a written record of the steps you took in response to that claim. List the questions you asked, the verification forms you sent out, and any signed affidavits you obtained. Show the list to your state housing agency auditors if they ask what steps you took to deal with household members who claimed no income.
A.J. Johnson, HCCP: President, A.J. Johnson Consulting Services, Inc., 3521 Frances Berkeley, Williamsburg, VA 23188; www.ajjcs.net.
Steven M. McDonald, CPM: Vice President, Westlake Realty Group, 520 S. El Camino Real, 9th Fl., San Mateo, CA 94401; www.westlake-realty.com.