With the revision of the IRS Audit Guide for the Low-Income Housing Tax Credit Program, the IRS is providing a comprehensive examination of the requirements of the program.
Chapter 1 of the Guide provides and introduction and overview of the program. As part of this overview, the Service explains its view of the role of both the IRS and the allocating agencies in the implementation of the program.
State Agency Responsibilities
The LIHTC program is jointly administered by the IRS and State Housing Credit Agencies (HCAs). Each state receives tax credits on an annual basis. The amount of credit provided to each state is generally based on the population of the state.
Qualified Allocation Plan (QAP)
HCAs are responsible for determining which housing projects receive credits and the amount of credit allocated. Under IRC §42(m) (1), the HCA must develop a QAP that is approved by the governmental unit having jurisdiction over the HCA. The QAP must have the following characteristics:
- Identify the selection criteria to be used for determining housing priorities that are appropriate to local conditions. The selection criteria must include project location, housing needs characteristics, project and project sponsor characteristics, tenant populations with special needs, public housing waiting lists, tenant populations of individuals with children, projects intended for eventual tenant ownership, the energy efficiency of the project, and the historic nature of the project.
- Gives preference to projects serving the lowest income tenants, for the longest periods, located in qualified census tracts, and which will contribute to a concerted community revitalization plan.
The HCA must use the QAP as the basis for the allocation of credits. Generally, developers apply for credits by submitting proposals that are ranked according to criteria in the QAP. If accepted, the HCA and developer will enter into a reservation agreement, followed by a binding commitment to allocate credits in the future; this is also known as a “carryover allocation.” In most cases, owners have until the close of the second calendar year following the year the carryover allocation is made to place the project in service. If this deadline is not met, the credit is returned to the state for reallocation to other projects.
An allocating agency may provide no more credit than is necessary to ensure a project’s financial feasibility during the 15-year compliance period. The amount of credit allocated will be the amount required to attract the equity needed to close the “gap” between the total development cost and the financing available to the project. Agencies will often adjust the credit awarded by adjusting the allowable qualified basis for the project. This can create “excess basis” for a project, and is a concept that I will discuss in detail in future articles.
The credit allocation is documented on Form 8609, Low-Income Housing Credit Allocation and Certification.
Compliance Monitoring
The QAP must contain the procedures the HCA will use when monitoring properties for Section 42 compliance. At a minimum, reviews must be conducted at least once every three years, during which at least 20 percent of the units will be reviewed. The monitoring must include both a physical inspection and administrative (file) review.
When noncompliance is identified or there has been a building disposition, the HCA must inform the IRS on Form 8823. If, at the time of the report to the IRS, the building is “out of compliance,”(i.e., the noncompliance has not been corrected), the IRS will send a letter to the owner identifying the type of noncompliance and instruct the owner to contact the HCA to resolve this issue. Once resolved, the HVA will file a “back in compliance” 8823 with the IRS.
IRS Responsibilities
The Low-Income Housing Credit (LIHC) Compliance Unit of the IRS is responsible for processing information submitted to the IRS by HCAs and taxpayers, providing assistance, and evaluating noncompliance for audit potential. This unit receives and processes 8823s and 8609s.
Based on HCA noncompliance reports, taxpayers are identified for audit potential. If it is determined that an audit is warranted, the complete file is sent to the appropriate IRS field office. The taxpayer is then notified that an audit has been scheduled. Audits may also be expanded, at the examiner’s discretion, to include additional issues or tax returns.
In my next article, I will outline the issues analyzed by the IRS in order to determine whether a LIHTC property should be examined.