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:
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:
Other Forms of Income
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:
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:
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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