Determining the Income of LIHTC Applicants and Residents

person A.J. Johnson today 09/14/2019

The determination of income is a primary requirement when determining the eligibility of applicants and residents at Low-Income Housing Tax Credit (LIHTC) Properties. While individual Housing Finance Agencies (HFAs) have their own requirements relating to the determination of income, there are some "best practices" that may be applied in most jurisdictions. Some types of income - especially relating to employment - can be challenging to calculate. This article will provide suggestions and recommendations for determining various types of income, but all LIHTC managers should be aware of any specific requirements of their HFA.

Regular Income

There are generally three ways to determine income from employment: (1) a verification of annual income (VOE) from the employer; (2) a projection from year-to-date [YTD) income, which may be found on an employment verification or pay stubs; and (3) the average number of hours/overtime hours as shown on pay stubs. Generally, if there is a different result when calculating income using more than one of the methods, it is recommended that management follow up to determine the "most likely" income and use that as the certified income. However, some HFAs require the use of the "highest" result when the calculations show different figures, so managers should have a clear understanding of the HFA requirement in this area. If there is conflicting information between documents (e.g., the VOE and pay stubs), managers should attempt to obtain written clarification from the employer. If written clarification cannot be obtained, it may be possible to use an oral clarification. It is also a good idea to request additional pay stubs, which may enable a more accurate determination of income.

Self-Employment

In general, the following information is recommended for verifying income from self-employment:

  • Tax returns from the prior one to three years. These should be obtained through the IRS transcript service (1-800-908-9946); the use of self-prepared returns is not recommended since there is no way to know if the returns were actually sent to the IRS.
    • Note: for self-employed individuals who claim not to file tax returns, managers should obtain a completed copy of IRS Form 4506-T - Request for Verification of Tax Filing with the IRS - in order to verify that no return has been filed. The IRS requires that all self-employed individuals making $400 or more per year must file a federal tax return, regardless of tax liability.
  • If a 4506-T shows that no return has been filed, the following information may be obtained to assist in determining self-employment income:
    • Profit & Loss Statement; or
    • Statements from recurring clients
  • It is also recommended that all self-employed individuals provide an Affidavit of Self-Employment on which they state an estimate of their gross and net business income for the upcoming 12-months.

Day Labor

Day labor is generally applicable to a person who waits in a specified location to do various odd jobs and is paid with cash. Day Labor does not usually have a recurring clientele and can have a significant variance in terms of income or hours worked. In certain cases it is not possible to obtain third party verification of Day Labor. For this reason, a self-certification of income from the applicant/tenant may be the only option. However, before accepting such a self-certification, management should demonstrate due diligence in processing the certification. Such diligence will include a written statement from the applicant outlining details of their work, including: (1) dates of work; (2) work locations; (3) types of work; and (4) income earned for the work that is done. Since this is a type of work that can be very difficult to verify, management should ensure that any verification method used meets the requirements of the HFA.

Anticipated Earnings

Generally, income for the upcoming 12-months should be based on current circumstances, which should be annualized. It is not recommended that anticipated earnings be used unless there is documentation supporting such anticipation. For example, unless there is a pending offer of a salaried position - including a start date - no anticipation of employment income should be made. If the only form of income is from a household’s "hope" for a future job, an HFA is very likely to question how the household will pay for rent, food, utilities, etc., and may require management to demonstrate how such items will be paid for.

Cash Wages

If an applicant claims that they do not receive pay stubs because they are paid in cash, the IRS has indicated that such individuals should be considered "independent contractors" and as such should file a 1040 tax return. In such cases, management should obtain a copy of the tax return (as outlined earlier) and should obtain a statement from the employer indicating the name of the employee, their position/title, and how much the employee is paid in cash each pay period.

If a household that is paid in cash claims they do not file a tax return, the 4506-T (as noted above) should be required, verifying the non-filing status, in addition to the third party statement from the employer.

Farm Labor

Farm labor presents unique verification challenges due to the varying employment timeframes. The growing seasons are often determined based on weather and cannot be precisely predicted. If the applicant/tenant receives unemployment assistance during the off-season, only the unemployment received during the layoff period should be counted - i.e., the unemployment does not need to be annualized, as is normally the case. To adequately determine income eligibility for farm labor applicants, the following procedures are recommended:

  1. Maintain a spreadsheet tracking the growing seasons of the farms in the area around the property. This will provide a historical perspective of work and lay-off periods for prospective residents.
  2. Require a completed VOE showing the anticipated lay-off period.
  3. Obtain a payroll printout (in addition to piece count paystubs) that shows gross amounts earned per pay period.
    1. The payroll printout should include the name of the applicant/tenant, the farm they work for, and the pay rate of the employee. If this information is not included, the printout will not be an acceptable verification.

Other Forms of Income

  • Social Security and Supplemental Security Income (SSI): Most HFAs will accept the current year award letters for regular Social Security and a current Proof of Income Letter (with 120-days) for SSI. Note that some HFAs may require a confirmation of Social Security income if the Award Letter is more than 120-days old.
  • Unemployment and TANF: Benefit letters dated within 120-days of the move-in/effective date should be obtained.
  • Pensions, Annuity Payments, or any other form of recurring payment (excluding gifts): a document from the entity providing the payment dated within 120-days of the move-in/effective date should be obtained.
  • Gifts: a signed and dated statement (notarized or witnessed) from the person providing the gift indicating the amount and frequency of the gift. An updated statement should be obtained for each recertification.
  • Unemployment Income: If the tenant does not have a seasonal/recurring job, the unemployment income should be annualized for 52 weeks, even if a "maximum benefit" amount is noted on the verification letter. If the applicant/tenant has a seasonal job, recurring job, or a firm job offer, the unemployment should only be calculated for the period it will be received.

Importance of Proper Verification

If an HFA is not satisfied with the documentation of income in a file, it is very likely to request additional documentation to demonstrate household eligibility. Such documentation may include:

  • Tax returns or W-2s for the move-in or recertification year;
  • Additional paystubs;
  • Clarification regarding the disposal of an asset; or
  • Verification of the termination of employment

Best Practice Forms

There are certain forms every well-run LIHTC property will have - many of which are required by HFAs. Some of these forms are as follows:

  • Comprehensive rental applications;
  • Recertification Questionnaires;
  • Child/Spousal Support Affidavits/Verifications;
  • $5,000 and Under Asset Affidavits or third party verification when assets exceed $5,000;
  • Student Status Affidavits;
  • Survival Statements for assisted households claiming zero income; and
  • Live-in Aide Verification Forms (if applicable).

Ultimately, the HFAs will be looking for "due diligence" on the part of owners and managers. While each type of income will present its own challenges, the documentation outlined in this article will serve the purpose of verification in most cases.

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