DDespite a recent increase in IRS audit activity relating to Low-Income Housing Tax Credit (LIHTC) projects, audits of such projects remain relatively rare. However, such audits do occur, and owners should ensure that record retention protocols include the documents that are likely to be part of any IRS audit.

If the IRS selects a LIHTC property or owner for audit, the initial step will usually be a notice by mail to the property owner. This notice will request documents to be made available for the audit. This request is known as an Information Document Request (IDR) and is issued on IRS Form 4564.

The IRS has broad authority when requesting documents. IRC §7601 empowers IRS employees to "inquire after and concerning all persons who may be liable for any internal revenue tax." IRC §7602 authorizes the IRS to examine any books, materials, data, or papers that may be relevant.

Owners should be aware of and familiar with the forms that the IRS will review as part of a Section 42 audit.

Owner-Submitted IRS Forms

In addition to the forms submitted annually when claiming the credits, owners are required to submit a one-time "First-Year Certification" on IRS Form 8609. This form identifies specific information needed for program administration and documents specific elections that will govern how the site is operated.

Form 8609

Part I of the 8609 is completed by the allocating agency. It documents approval of the building (every building receives a separate 8609) and shows the maximum annual credit that may be claimed on the building.

Part II of the form is completed by the owner and specifies a number of elements critical to operating the building. Owners are not entitled to credits until Part II has been completed and sent to the IRS. Housing Finance Agencies (HFAs) are often slow in issuing 8609s and owners may be tempted to claim credit prior to receipt of the 8609. The IRS takes his very seriously and may believe that an owner is fraudulently claiming the credit. If an owner cannot provide a reasonable explanation for an early claiming of credits, the IRS may disallow and/or recapture credits.

The Form 8609 is only submitted for the first year of the credit period.

Form 8609-A

This form is sent to the IRS for each year of the 15-year compliance period. The form is submitted for each building and is a complement to the 8609. It is this form that shows the amount of credit for a building each year.

Form 8586

This form summarizes key information from the Forms 8609-A and is filed with the IRS for each year that credits are claimed. This form shows the amount of credit claimed for the entire project during that year (the 8609-A forms show credit for each building).

Form 8823

This form is submitted by the HFA to the IRS whenever an HFA discovers noncompliance or an owner disposes of a property through sale, foreclosure, or destruction. An uncorrected 8823 is a major trigger to potential IRS audit activity.

General Recordkeeping & Retention Requirements

26 CFR Part I - 1.42-5(b) specifies owner recordkeeping and retention requirements for the Section 42 program. In addition to the retention of site records, owners must also provide annual reports to the HFA. At a minimum, the following records are required:

Initial Information Document Request (IDR)

The first document request is likely to ask for the following:

Every owner of a LIHTC project should have a system in place for retaining records required by the Internal Revenue Code. The items noted above will form the core of the documents to be retained and protected.