Claiming Credits without an IRS Form 8609 – Guidance from the Audit Guide
IRC §42(l)(1) requires that taxpayers complete a certification with respect to the first year of the credit period. This certification is made by completing Part II of the Form 8609 that has been provided by the state agency to document the allocation of low-income housing tax credits. This form must be completed for credits allocated under the state agency allocation and for credits allocated for properties financed with tax-exempt bonds. The form must be sent to the IRS no later than the due date of the first year tax return (including extensions) for which the taxpayer claims credit. The form is submitted to the IRS only one time.
Each year, including the first year of the credit period, the taxpayer must complete and submit IRS Form 8609-A, Annual Statement for Low-Income Housing Credit.
When conducting an audit, the IRS will determine if the operation of the project is inconsistent with the information and elections documented on the 8609.
Critical 8609 Issues
>§42(i) (1) (E) states “In the case of a failure to make the certification required… on the date prescribed therefore, unless it is shown that such failure is due to reasonable cause and not to willful neglect, no credit shall be allowable by reason of subsection (a) with respect to such building for any taxable year ending before such certification is made.” This clearly places the burden on the taxpayer to show an entitlement to any credit claimed without a state issued 8609.
The IRS Audit Guide states that taxpayers may file amended tax returns to claim credits that they were entitled to but did not claim due to the fact that no 8609 had been issued by the state agency. This is the most appropriate way to handle the claiming of credits when no 8609 has been submitted to the IRS. I.e., once the 8609 is issued by the state and submitted to the IRS by the taxpayer, the taxpayer should amend the applicable prior tax returns to claim the appropriate credits.
What is “Reasonable Cause” for Claiming Credits without an 8609?
The term “reasonable cause” is not defined in the Code, but Treasury Regulation §301.6651-1(c) (1) provides that, to demonstrate reasonable cause, a taxpayer filing a late return must show that he “exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.” In other words, the failure to file the form when required was beyond the control of the taxpayer.
A determination of reasonable cause must be based on an evaluation of all the facts and circumstances on a case-by-case basis. The IRS will consider the following factors:
>How long after the end of the first year of the credit period did the taxpayer receive the 8609s from the state agency? How many years has the taxpayer claimed the credit without completing the certification? How did the taxpayer answer question C of Form 8609-A when filing tax returns and claiming credits? (Question C asks if the taxpayer has an original Form 8609 issued and signed by the state agency).
>Did the taxpayer have other problems while noncompliant with the requirement to submit the 8609? If so, how were the problems resolved?
>What reason did the taxpayer give for the delay? To show reasonable cause, the dates and explanations should clearly reflect efforts to timely resolve the problems and expeditiously obtain the 8609s from the state.
>Is the GP a professional specializing in the development and management of §42 properties? If so, they would be expected to know the requirements relative to submission of 8609s.
>Forgetfulness, oversight, or reliance upon another person does not support a determination of reasonable cause.
Taxpayers bear the burden of demonstrating that the failure did not result from a willful neglect and that there was a reasonable cause for failing to complete and submit the 8609(s) by the deadline.
Can the Taxpayer Blame the State Agency?
A taxpayer may argue that delays were caused by the state agency responsible for completing the Forms 8609. If the Agency is at fault, the taxpayer is not subject to credit disallowance or recapture. Taxpayers should keep in mind however, that blaming the State may not be the best option, since a delay in the State issuance of the 8609 may indicate problems with the project itself.
If it is determined that reasonable cause does not exist, or there was willful neglect, no credit is allowable for any tax year before the completion of the 8609. The entire credit will be disallowed for all tax years open by statute, and a portion of credit can be recaptured in years closed by statute or otherwise not examined.
The bottom line – it is strongly recommended that credits not be claimed prior to the filing of an 8609 with the IRS.