Documents to Retain for LIHTC Projects

Documents to Retain for Low-Income Housing Tax Credit Projects

In September 2014, the IRS published the Audit Guide for Low-Income Housing Tax Credit Projects. This guide is intended to assist IRS agents during an examination of a Section 42 Low-Income Housing Tax Credit partnership and project.

Chapter 2 of the Guide, “Precontact Analysis,” outlines the documentation agents should review prior to actually contacting the taxpayer regarding the audit and information to request from the taxpayer at the beginning of the audit.

Owners of LIHTC projects should be familiar with these documentary requirements and should ensure that the documents likely to be requested as part of an audit are available. For this reason, it is important that owners have a system of document retention in place to ensure the availability of all required documents.

The IRS will already have certain documents relating to the project, and will review those prior to beginning the actual audit. These documents include:

• Form 8609;
• Any 8823s issued by the State HFA;
• Form 8609-A (Annual Statement for Low-Income Housing Credit), which is submitted to the IRS annually;
• Balance sheets included with tax returns;
• Schedule K and Schedule K-1s;
• Prior and subsequent year tax returns; and
• Returns related to the tax return under audit (e.g., if an adjustment on one return requires an adjustment on another return or if the General Partner [GP] is also the GP on other tax credit deals, etc.)

Documents likely to be requested from the taxpayer, and those for which a retention plan is required include:

• General information about the taxpayer
  • Partnership Agreement;
  • Prospectus or Offering Memorandums;
  • Documentation pertaining to the partners capital contributions;
  • Credit Allocation Application;
  • Market Studies;
  • Credit Allocation Award/Contract or Carryover Allocation;
  • Extended Use Agreement;
  • All Forms 8609 issued to the Taxpayer (remember, the IRS will also have copies of these, so make sure they match what was sent to the IRS); and
  • Internal Audit Reports (e.g., corporate or third party reviews of the property).
• Tax Returns – while the Service will have copies of the returns, they will also want
  • Copies of tax returns for the tax year prior to the earliest year under audit and all tax returns for years after the tax years under audit;
  • Trial balance and any work papers used to prepare the tax return under audit; and
  • Depreciation schedules.

• Documents relating to eligible basis, including:
  • Final cost certification submitted to the state agency with supporting documentation; e.g., purchase agreements and construction contracts, or settlement documents if existing buildings were acquired;
  • Documentation of all financing sources; e.g., grants, loans, tax-exempt bonds, below-market federal loans, and loans payable to the developer or any partner, and all debt instruments such as mortgages and promissory notes;
  • Financial reports, including compilations, reviews, or audited financial statements;
  • Development contracts or agreements for the acquisition, construction or rehab of the project with related payments and/or noted; and
  • Documentation of cost allocations between land, land improvements, and depreciable residential rental property included in eligible basis.
• Information on the Qualification of Low-Income Households, including:
  • Rent rolls for each year under audit; and
  • Documentation of internal controls in place to ensure that income qualified households occupy the low-income units (e.g., copies of written procedures) and the taxpayer’s policies (e.g., employment requirements and training).
• Information Relative to Year 1 and 11 of the Compliance Period:
  • Certificates of Occupancy or other documentation of when the units were first available for occupancy;
  • A schedule showing when each low-income unit was first occupied by an income-qualified household; and
  • Computation of the applicable fraction, including the computation for the applicable fraction for each month of the first year of the compliance period.
• If the project had additions to qualified basis (i.e., “2/3 units”), the following information will be requested:
  • List of units first occupied by qualified tenants after the end of the first year of the credit period and when a qualifying household first occupied the unit; or
  • Confirmation that all units were occupied by qualified households by the end of the first year of the credit period.
• Documentation Relating to Income:
  • Description of residential rental units, including total number of units, total number of low-income units, size of units, and rents charged for each unit.
    • Also, be able to identify units for employees or security officers.
  • Documentation that rents were properly restricted;
  • Sources of rental subsidies (e.g., Section 8);
  • Utility allowances and documentation of the computation;
  • Fees for services provided to tenants in addition to housing; e.g., providing meals or cleaning services in assisted living housing;
  • Other income from related activities; e.g., vending machines, laundry facilities, or charges for cable/satellite television;
  • Other income sources such as from the commercial use of a portion of the property; e.g., income from a cell phone tower installed on the roof of a building; and
  • Documentation of funds received from other sources; e.g., federal grants or subsidies received during the year, additional capital contributions, or loan proceeds.
• If 8823s were issued against the property, the taxpayer will be requested to document corrective actions taken.
• If the property was sold, documentation regarding the sale will be requested. In particular, the Service will be interested in
  • Sales contract & Settlement Documents;
  • Computation of the capital gain/loss;
  • How the gain/loss was distributed among the partners; and
  • Whether the sale required the new owner to operate the project as a qualified low-income project for the remainder of the 15-year compliance period.

At a minimum, the documents noted above should be retained – and secured – for at least six years after the due date of the tax returns for the last year under audit. In the case of documentation for the first year of the credit period, this should be kept for at least six years after the due date of the tax return for the last year of the compliance period.