The 8823 guide makes numerous references to instances when a tax return can be useful in the verification process. Spectrum recommends owners obtain a copy of each applicant’s most recent tax return or proof that the applicant is not required to file.

Here are references to the 8823 guide and examples to illustrate the how obtaining a tax return can be useful.

Self Employment: The 8823 guide states, “A tax return must be filed for all self-employed individuals who operate sole-proprietorship businesses or otherwise report income on Schedule C, regardless of whether the taxpayer is reporting a profit or a loss. If the person is not eligible to get an SSN, which is needed to file a tax return, an individual taxpayer identification number (ITIN) can be obtained using IRS Form W-7,” (4-12).

Example: Julie and Wil apply for a LIHTC unit. On the application Julie says she is self employed as a hair stylist. Wil says he works at Lowe’s. The couple’s 2011 joint tax return shows Wil’s wages on line 7 (wages, salaries, tips, etc.) and his w-2 is attached.  Julie lost income in 2011 and the negative amount is listed on the on line 12 (Business income or (loss) and Schedule C. The household is eligible because the tax return and Schedule C were filed.

Example: Rosario applies for a LIHTC unit. She does not have a SSN or TIN. She works at a local restaurant as an “off the books” employee who is paid cash and does not receive a w-2 or 1099 form. She earns sufficient income to be required to file a tax return. Rosario should not be allowed to rent an LIHTC unit because she does not file taxes as required.

Households & Family Size: “When determining family size for income limits, the owner must include the following individuals who are not living in the unit…Children in joint custody arrangements who are present in the household 50% or more of the time. If disputed, determine which parent claimed the children as dependents for purposes of filing a federal income tax return (4-3).”

Example: Austin applies for housing with Jessica, his 6-year old daughter. Austin’s income is over the 1- person income limit but under the 2-person income limit. Austin’s 2011 tax return shows he claimed Jessica as his dependant. According to the 8823 guide, Austin is eligible for LIHTC housing using the 2 person income limit.

Student Status: The 8823 Guide states, “A unit shall not fail to be treated as a low income unit merely because it is occupied…entirely by full-time students if such students are

I. single parents and their children and such parents are not dependents (as defined in IRC §152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of another individual and such children are not dependents (as so defined) of another individual other than a parent of such children,3 or II. married and file a joint return” (p. 17-2).

Both these exemptions can be verified by obtaining a tax return.

Example: Marie applies for housing with her daughter. Both are full time students. Marie provides a copy of her 2011 tax return showing she claims her daughter as a dependant. She meets exemption I.

Example: Bruce and Jennie apply for LIHTC housing. They are married and both are full time students at the local community college. Bruce and Jennie provide a copy of their 2011 tax return showing they filed jointly and therefore are eligible for LIHTC housing.

Tenant Misrepresentation or Fraud:  “If misrepresentation is suspected, additional steps should be taken to verify the accuracy of information provided by the tenant. See Chapter 4. Treas. Reg. §1.42- 5 gives examples of how an income certification may be documented, including the submission of federal tax returns” (p. 25-1).

Example:  At move in 2/1/11 Gloria claimed to be zero income. At recert she reports being employed at Sears. Her hire date on the EV is prior is 9/6/2010, which is prior to her move in date. The owner asks Gloria for her 2010 and 2011 tax returns. The returns show she claimed income from Sears on her 2010 and 2011 tax return. Gloria committed fraud by not reporting this income prior to move in.

Seasonal/Sporadic Income: The 8823 Guide states, “There will be situations where it will be difficult to estimate income. For example, the tenant may work sporadically or seasonally. In such cases, owners are expected to make a reasonable judgment as to how to the most reliable approach to estimating what the tenant will receive in the coming year” (p. 4-7). In these situations the most reliable approach to estimating upcoming income may be looking at previous income. This can be done by obtaining a tax return(s) and w-2 forms.

Example: Paul has been a seasonal worker for a landscaping company for 4 years. On the EV the employer says income is unknown because employment is dependent on the weather. It is currently the off season so no current pay stubs are available.  In this case the owner decides the most reliable approach to estimating upcoming income is to obtain Paul’s previous 3 years tax returns and w-2 and count the highest previous earnings.

Unemployment: The 8823 guide states, “If information is available on changes in income expected to occur during the year, use that information to determine the total anticipated income from all known sources during the year” (p. 4-9). When someone is unemployed and receiving unemployment benefits that income may not be expected to continue for the next 12 months. The 8823 guide states, “Owners are expected to make reasonable judgments regarding the most reliable method for estimating the income a household will receive during the year. If the tenant’s income cannot be determined using current information, the owner may include actual income received or earned within the 12-month period before the determination of annual income” (p. 4-9).

Example: At time of application Kristen is collecting unemployment benefits. Her unemployment benefits will run out 12 weeks after move. Kristen is currently seeking employment and anticipates earnings similar to her previous job. The owner has Kristen complete a Unemployed Affidavit where she states her anticipated earnings and obtains her previous tax return(s) and w-2(s). The highest determination of anticipated income is counted.

If an applicant claims he is not required to file a tax return this can be verified using IRS form 8821. http://www.irs.gov/pub/irs-pdf/f8821.pdf. This form authorizes an individual other than the taxpayer to receive and discuss the taxpayer’s account information. It allows the IRS to disclose information to this 3^rd party.  The applicant should complete the form and specify who is being appointed as the 3^rd party designee and what tax periods can be disclosed to that designee. The 8823 guide states, “If necessary, the owner can ask the potential tenant to provide a signed Form 8821, which will allow the owner to verify the information with the IRS” (4-12).

Example: Henry receives a VA pension each month. He says he is not required to complete a tax return. Recommend having Henry complete Form 8821 so the owner can verify that he is not required to file.

As demonstrated in the 8823 Guide a tax return can be a useful tool when addressing a number of eligibility concerns. For this reason Spectrum recommends owners obtain a tax return(s) for each applicant or obtain proof that the applicant is not required to file.

Spectrum is proud to announce it will be offering Online Training for the Tax Credit program!  We are currently in the production phases right now and will be sharing updates here and through email contact.  If you would like to be added to the email list please send request to jessica@spectrumseminars.com or comment below!

The Spectrum Companies has a long history of charitable donations to groups throughout the country.  My proudest moments working for this company have come at our annual compliance symposium when Steve Rosenblatt presents checks to groups such as as the NYC Firefighter Widow’s and Children’s Fund, NYC Fire Department Emerald Society Pipes and Drums, and high school marching band members in New Orleans, Boston & Baltimore.

Starting in 2012 the Spectrum Private Monitoring Division has built on this important quality to include separate donations reflecting the work we do with affordable properties across the country.  For every new property we begin working for we will donate $35 (the equivalent of one move in approval charge) to the following charitable organizations:

• The Fresh Air Fund:  Providing free summer vacations to New York City children from low income communities since 1877.
• Big Brothers Big Sisters of Southern Maine: focused on helping children discover their potential and find their places in society.
• Open Door Mission: Located in Omaha, NE helping to break the cycle of homelessness and poverty.
• Preble Street Resource Center: Located in Portland, ME providing solutions to homelessness, hunger, and poverty.

We encourage our clients to nominate exceptional organizations within their communities for consideration in our 2013 initiative.

If you were fortunate enough to attend the 2011 Spectrum Symposium in NYC you will know that Friday morning started with a fun game of LIHTC Trivia. I think I can clearly say that fun was had by all! Plus there were great prizes! I am now seeking your help to make the 2012 Trivia Game an even bigger success!

I am looking for FUN, INTERESTING, and CREATIVE trivia questions. Questions can be related to:

• Tax Credits
• HUD
• Section 42
• Physical Inspections
• Training
• Forms

Here are some of the questions used last year:

• What year was the LIHTC program signed into law? What President signed the bill?
• On July 18, 2011, what Senator, from what state released a deficit reduction proposal entitled “Back in Black” in which he called for the elimination of the LIHTC program?
• What celebrity LIHTC investor played first base and designated hitter (DH) for the Boston Red sox and was awarded the American League MVP in 1995?
• Name the 12 cities that have held the annual Spectrum Symposium?

Have fun and be creative!

Please email your question with the correct answer to cturner@spectrulihtc.com! or leave them in the comment section below. Thank you for your assistance. I hope to see all of you in Washington, DC.

If you are looking for registration information please refer to www.spectrumseminars.com. The 2012 Spectrum Symposium will be held in Washington DC on November 14-16 at the Grand Hyatt Washington.

In today’s economy, we are seeing more and more people giving up or losing their homes and subsequently looking for more affordable housing.  Since tax credit apartments meet this criteria, we are seeing an increase in applicants that have owned, or still own, Real Estate (RE).  Verifying this asset and figuring out what to count on the TIC can be a little confusing.  It is important to keep in mind that an asset is an item of value that may be converted to cash.  For RE, the “cash value” is the market value less any reasonable expenses that would be incurred in selling or converting the asset to cash.

The first step to determine how to count RE is to ask questions to find out the status of the asset.  Is the property for sale, is it being rented out, is the property owned jointly, has it been given away or sold for less than fair market value, or has the applicant lost it due to bankruptcy, foreclosure, or divorce?  The answer to these questions determines how to count the RE.

For Sale (still owned) – You will need to verify the fair market value of the property, the amount still due on the mortgage (if any), and any closing costs that would be incurred.  Obtain the market value from the real estate broker selling the house.  The tax valuation or appraised value is not an accurate value and should not be used.  Another source to determine market value is www.zillow.com.  Using a RE Asset Worksheet, subtract the closing costs and current mortgage principle from the market value.  This is the cash value to be counted as an asset on the TIC.  If the property is owned jointly with someone that is not in the household this amount should be multiplied by the percentage the applicant owns.

Example 1 – Mrs. Smith’s home has a FMV of $200,000.  She still owes $50,000 and the broker has stated that the closing costs would be $6,000.  The total cash value for the property to count on the TIC is $144,000 ($200,000 – $50,000 – $6,000).

Rent – You will need to verify the rental income for the next 12 months and the expenses to rent the property over the next 12 months.  The expenses would include taxes, insurance, maintenance and utilities, and mortgage interest.  If the property is already being rented, the most recent tax return can give you all of this info.  Using the RE Asset Worksheet, subtract the total expenses from the rental income to determine the income from the asset.  Again, take ownership percentage into consideration.  Also, since the applicant still owns the home and could turn it into cash at any moment, the cash value still needs to be counted.

Disposed of for less than FMV – If the property was sold for a discounted amount, or if it was given away for nothing (such as to a family member or friend), then it was disposed of for less than FMV and needs to be counted for a period of 2 years from the date it was disposed.  To determine the value of the asset in this case, see For Sale above.  If the disposal occurred more than 2 years prior to the move-in date then it is not counted as an asset.

With the current housing market condition, many houses are being sold for less than what they were once valued at.  This does not necessarily mean it was disposed of for less than FMV.  If the listing price is lowered because the property had not sold yet, it would still be considered at “fair” market value as the market is forcing the lower price tag.

Bankruptcy, Foreclosure, or Divorce – If RE was lost for any of these reasons, then it is not considered an asset and is not counted.  Of course, you must properly verify this for the file.  All three of these instances should be able to be verified through court documents detailing the outcome of the hearing.  If the foreclosure, bankruptcy, or divorce process has no begun yet, the asset must be counted in full until the process is complete.

Gross rents at a tax credit property never have to fall below what they are the first credit year. This is known as the Gross Rent Floor. But how is the gross rent floor determined?

Rev. Proc. 94-57 gives guidance:

1. If the taxpayer received an allocation of credit under IRC §42(h)(1), the IRS will treat the gross rent floor as taking effect on the date the state agency initially allocated the housing credit to the building
2. For a bond-financed building described in IRC §42(h)(4), the IRS will treat the gross rent floor as taking effect on the date the state agency initially issues a determination letter to the building.

However, in either case, the building owner has the option to choose the building’s placed in service date as the date the gross rent floor takes effect. This can happen if the building owner informs the state agency that made the allocation of this decision no later than the placed in service date. If this is done, the IRS will treat the gross rent floor as taking effect on the building’s placed in service date.

It is common knowledge among my colleagues and I that those properties we audit that have strong managerial teams have less noncompliance, friendlier tenants, and greater “curb appeal”. What we feel immediately when we arrive at these properties is a sense of community. There are several contributing factors we recognize that make a superior property. First is a highly trained management team. Those properties that have continuing education for its employees in the housing field often have lower turnover rates and higher occupancy. Secondly, strong oversight from upper management or ownership is a key factor in quality control of a property. Reports of noncompliance decrease dramatically when everyone from regional managers to ownership is involved in the daily workings of the property. Lastly, a highly experienced maintenance team is worth its weight in gold. A maintenance staff is often the most familiar with the property grounds and its tenants. They are the eyes and ears of the property and can keep the property manager abreast of what is happening on site.

I’m constantly amazed at the work ethic of property managers I meet. They are emotionally invested in their properties and are constantly striving to make it a desirable place for anyone to live. We understand the complexities of managing one of these sites. From screening for qualified applicants, determining income and assets, and generally just dealing with the complicated rules of the Low Income Housing Tax Credit Program.  It takes a highly trained and experienced property team to manage one of these sites.  So I personally would like to recognize all of those property managers out there working so hard to provide clean, safe, and well run properties.

Here is what other Spectrum auditors had to say when asked what they thought made a good property management team.

“The entire staff seems to understand the tax credit program. They all seem to know their tenants and community as well. This is also usually followed up by a good maintenance staff that is on the same page as everyone else.”

“They’ve got to be tough. They have to be able to strike a balance between understanding and caring about the tenant but also realizing they have a job to do.”

“It goes a long ways when I see that the property manager knows the children on site. This is a good sign the manager is really involved on site.”

Recently, I was asked how management should verify Social Security benefits to be in compliance with tax credits.   The property has HUD financing as well as tax credits and management was concerned because HUD has requested that owners use EIV as the primary source for verifying Social Security.  They were also unsure of how to verify the benefit since SSA no longer honors third party requests for verification.

EIV (Enterprise Income Verification) is a topic that keeps popping up within tax credit compliance.  This is a system where certain third party sources share income information on tenants participating in HUD rental assistance programs.

EIV cannot be used to verify income for tax credit residents.  This page shows which HUD programs can use the EIV system http://www.hud.gov/offices/hsg/mfh/rhiip/eiv/resincdisc.pdf.  Please note if your property has both HUD and tax credits you still cannot use EIV to verify income, nor can it be in the tax credit portion of your file.  To answer the above questions posed by management, I would recommend having either two separate sections of a file – one for tax credits and the other for HUD or having two separate files altogether.  In the HUD file you would use the EIV system and for tax credits you would follow regular procedures for verifying income and assets.  To verify Social Security benefits for tax credits you would simply obtain the annual award letter, making sure to use COLA if needed.  As always, be sure to check with your state agency for specific policies.

Determining gross annual income can sometimes be difficult, especially when an applicant does not understand, or management does not have enough training as to what is to be considered income.

Case in point:

I was at an audit of a 100% tax credit family property and pulled a new move-in.  A man and his girlfriend had applied and moved in a few months prior to the audit.  Both were working part-time jobs.  The rental rate being paid was $1000.00.  When looking at the application I noted that the man listed a brand new Tahoe as his car.  I looked at the credit report in the file and saw that the truck was financed and the monthly payment was $675.00.  After calculating the part-time employment incomes, I realized that there was either another source of income or someone was making the truck payment for the tenant.  I asked the manager if perhaps there was another source of income that we did not know about and she said “no, his parents are making the payments”.

HUD states that annual income includes all amounts, monetary or not, that go to or are received on behalf of the family head, spouse or co-head.

The truck payments that the tenant’s parents were making on behalf of the tenant were a source of income that should have been verified prior to move-in.  Thankfully, this income was not enough to take the household over the income limit.

Last November Spectrum Seminar’s held the annual symposium in New York City. During one of the sessions we discussed significant increases in income discovered at the first annual certification. A question was asked whether or not it is recommended for a management company to terminate a household’s tenancy whenever income is above the move-in limit at the first annual certification.

I found this question particular disturbing and absolutely caution you against this practice. As you all know, households can often have changes in circumstances that result in an increase in income after move-in. The only time a household should be asked to leave their unit when fraud has occurred. If you discover that the household did not disclose all sources of income prior to move-in then eviction proceedings should be started.

If move-in documentation is solid and the household had an unanticipated change in income such as a promotion or new employment, eligibility is not affected. Once a household is income eligible, they are always eligible and should not be asked to leave the property.

Please refer to Chapter 26 of the IRS Audit Guide (Tenant Good Cause Eviction and Rent Increase Protection)

Good Cause

The owner of an IRC §42 property must be able to demonstrate if challenged in state court that good cause existed to support the eviction or termination of a tenant from a low-income unit. For purposes of IRC §42(h)(6)(E)(ii)(I), good cause is determined by the state and local law applicable to the location in which the IRC §42 property is located. State or local law examples of good cause evictions may include nonpayment of rent, violations of the lease or rental agreement, destruction or damage to the property, interference with other tenants or creating a nuisance, or using the property for an unlawful purpose.

Out of Compliance

Annual Certification

Owners are out of compliance if they fail to certify annually, or certify incompletely or inaccurately, under the penalty of perjury, that for the preceding 12-month period no tenants in low-income units were evicted or had their tenancies terminated other than for good cause and that no tenants had an increase in the gross rent with respect to a low-income unit not otherwise permitted under IRC §42.

In Summary evicting households simply because their annual income has increase is not “Good Cause”. Is practice could lead a report of noncompliance.