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The IRS 8823 Guide and OHCS LIHTC Compliance

The IRS 8823 Guide and OHCS LIHTC Compliance. Jennifer Marchand OHCS Multifamily Technical Advisor Oregon AHMA April 17, 2019. Agenda. Introductions Audience Poll Basics of a Tax Credit Basics of 8823 Guide and Purpose 8823 Process (OHCS filing with IRS) IRS Processing of 8823’s

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The IRS 8823 Guide and OHCS LIHTC Compliance

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  1. The IRS 8823 Guide and OHCS LIHTC Compliance Jennifer Marchand OHCS Multifamily Technical Advisor Oregon AHMA April 17, 2019

  2. Agenda • Introductions • Audience Poll • Basics of a Tax Credit • Basics of 8823 Guide and Purpose • 8823 Process (OHCS filing with IRS) • IRS Processing of 8823’s • Overview of Reportable Findings • Tips for Conquering Non-Compliance

  3. Disclaimer This material was designed specifically for training purposes and should not be relied upon or cited as IRS authority.

  4. Tax Credit Compliance Basics • What is a Tax Credit (LIHTC)? • Tax Credit Interested Parties • Important Tax Credit Delivery Timeline • First 15 vs. Post 15 (30 year Commitment) • Importance after Year 15 and Beyond

  5. 8823 Purpose • What is an 8823? • Purpose of 8823 Guide • Additional IRS Resource Audit Technique Guide

  6. General OHCS 8823 Process • OHCS Required Reporting as established by IRS • Timing and Filing Requirements • Adding Notes to Filing

  7. IRS Processing of 8823 • IRS process after receiving 8823 form from OHCS • IRS Computer System Update • Tracking for Audit Purposes • What do you do when you receive an 8823 form? • Calculating Possible Recapture

  8. Corrected or Not Corrected? • Filing 8823 as Corrected vs, Non Corrected • Important time frames to consider for out of compliance and back in compliance dates per building • Correcting previously filed non corrected 8823 forms and tracking • What about items corrected the day of inspection? • Future Correction dates noted on response

  9. Review of 8823 Form The form allows for sixteen specific reportable areas of noncompliance and one “other” line items 11a to 11q All specific reportable areas are discussed in the 8823 guide by chapter

  10. 8823 Form 11a Income Household Income Above Income Limit upon Initial Occupancy This category is used to report units that have been rented to households with incomes that do not meet income eligibility restrictions. According to IRC §42(g)(1), an owner of a tax credit property must elect to serve tenant populations with gross incomes that are either 50% or less of Area Median Gross Income (AMGI) or the National Nonmetropolitan Median Gross Income (NNMGI) when applicableor 60% or less of AMGI or NNMGI when applicable, as adjusted for family size. *Income Averaging will be established soon in Oregon

  11. LIHTC Income Calculation • Use standard HUD 4350 method for Income and Asset Calculation • IRS allows Under $5,000 Asset Certification • IRS has made it clear that they use the HUD 4350 method of calculation but not necessarily the method of verification

  12. Income Discussion • Income Calculations are not performed correctly (averaging issue) • All Income is not accounted for • Owner/Agent does not ask additional questions when unclear or inconsistencies exist • Phantom vs. Verifiable income • Income Certifications are not completed or are late • Acq/Rehab certifications not completed

  13. 8823 Form 11b Recertification Owner Failed to Correctly Complete or Document Tenant’s Annual Income Recertification Under Treas. Reg. §1.42-5(b)(1)(vi), owners are required to complete an annual income certification for each low-income household. The recertification process is identical to the initial certification in terms of documenting household composition, income, and income from assets. State agencies are required to review the tenant income recertification's and the supporting documentation for the tenants in the units.

  14. Recertification Discussion • 100% Tax Credit Properties exempt from annual certifications • Mixed Use must third party certify annually • Oregon Requires first annual for first 15 • Exception for PB Sec 8 and RD certified households • Self Certifications needed for HERA Data Reporting • Rule for tenants who have given notice • Importance of pre-inspection audits

  15. 8823 Form 11c UPCS Violation(s) of the UPCS or Local Inspection Standards This category is used to report noncompliance when rental units, building exteriors and systems, common areas, or the property site in a project are not suitable for occupancy. State agencies should assess whether low-income housing tax credit projects are in safe, decent, sanitary condition and in good repair, according to the Uniform Physical Conditions Standards (UPCS) established by HUD

  16. UPCS Discussion • All levels must be reported • Extension information and timing • Construction defect issues • Using REAC for inspection

  17. 8823 Form 11d Annual Certifications (CCPC) Owner Failed to Provide Annual Certifications or Provided Incomplete or Inaccurate Certification This category is used to report owners of low-income housing projects who fail to submit annual certifications, or any other required reports and documentation, to the state agency as described in Treas. Reg. §1.42-5(c). Monitoring procedures require certifications (and state agency reviews of the certifications) at least annually for each year of the 15-year compliance period. Monitoring procedures may require certifications (and state agency reviews) more frequently than annually, provided that all months within each 12-month period are subject to certification.

  18. Annual Certification Discussion • CCPC due February 28th each year • All information and activity for all units for previous reportable year (January 1st to Dec 31st) must be sent • WCMS must contain all information and be updated or OHCS.10 form is required • All requested documentation must be attached • Owner must sign

  19. 8823 Form 11e Eligible Basis Changes in Eligible Basis This category is used to report violations associated with the Eligible Basis of a building or any occurrence that result in a decrease in the Applicable Percentage of a Building. The Eligible Basis of a property is reduced when space that originally qualified as residential rental property changes character or space that was originally designated for use by qualified tenants is no longer available to them.

  20. Eligible Basis Example Laundry Room and Coin Operated Washers and Dryers An owner included the cost of a building housing a laundry facility in the eligible basis. For security reasons, the room kept locked, but every household has a key and has access at any time. The owner installed coin operated washers and dryers. The owner can include the cost of the building in eligible basis; i.e., all tenants have access to the facility. However, because the tenants must pay an additional fee to use the washers and dryers, the appliances should not be included in eligible basis.

  21. Eligible Basis Discussion • Parking • Storage and Garages • Community Room or Community Areas • Computer Rooms • Management Units • Commercial Space • Daycare • Swimming Pools

  22. 8823 Form 11f Minimum Set Aside Requirement Project Failed to Meet Minimum Set-Aside Requirement This category is used to report projects that have violated the minimum set-aside rule; i.e., the number of qualifying units falls below the minimum requirement. Under IRC §42(g)(1), a “qualified low-income housing project” means any project for residential rental property if the project meets one of the two requirements below, whichever is elected by the owner on Form 8609, line 10c. The choice of minimum set-aside also establishes the income limit and rent limit applicable to low-income units in the project. 20@50 or 40@60

  23. Minimum Set Aside Discussion Read the 8609’s Each building is considered a separate project under IRC §42(g)(3)(D) unless, before the close of the first calendar year in the project period, each building that is, or will be, part of a multiple-building project is identified as such by checking the “yes” box on line 8b of Form 8609 and attaching the statement described in the instructions for line 8b. The minimum set-aside documented on Form 8609, line 10c, must be the same for all buildings in a multiple-building project.

  24. 8823 Form llg Rents Gross Rent(s) Exceed Tax Credit Limits This category is used to report noncompliance with the rent restrictions outlined in IRC §42(g)(2). Items to consider when determining whether the rent is correctly restricted include services provided, revisions to HUD income limits, rent, changes in the tenant’s income, Section 8 tenants, Rural Housing Service (formerly FmHA) rents, and supportive services.

  25. Rent Discussion • Under Treas. Reg. §1.42-11(a)(3), the cost of services that are required as a condition of occupancy must be included in gross rent even if federal or state law required that the services be offered to tenants by building owners. • IRC §42(g)(2)(B) also requires that the gross rent include a utility allowance if the tenant pays utilities • All non-optional fees must be included in gross rent

  26. Rent Discussion • Home and LIHTC use more restrictive • PB sec 8 • Housing Choice Voucher Holders and Payment Standard • Update UA timely • Leave a “buffer” • Request rent approval (read wording in REUA)

  27. BE VERY AWARE RENTS Once a unit is determined to be out of compliance with the rent limits, the unit ceases to be a low-income unit for the remainder of the owner’s tax year. A unit is back in compliance on the first day of the owner’s next tax year if the rent charged on a monthly basis does not exceed the limit. An owner cannot avoid the disallowance of the LIHC by rebating excess rent or fees to the affected tenants.

  28. 8823 Form 11h General Public Project not Available to the General Public This category is used to report properties that are not available to the general public. A residential rental unit is for use by the general public if the property conforms to the requirements of Treas. Reg. §1.42-9. The general public use rules are violated any time the general public is denied access to LIHTC housing.

  29. General Public Continued Under Treas. Reg. §1.42-9(b), if a residential unit is provided only for a member of a social organization or provided by an employer for its employees, the unit is not for use by the general public and is not eligible for credit under IRC §42. However, as clarified in IRC §42(g)(9), a qualified low-income project does not fail to meet the general public use requirement solely because of occupancy restrictions or preferences that favor tenants (1) with special needs, (2) who are members of a specified group under a Federal program or state program or policy that supports housing for such a specified group, or (3) who are involved in artistic or literary activities. In addition, any residential rental unit that is part of a hospital, nursing home, sanitarium, life care facility, retirement home providing significant services other than housing, dormitory, trailer park, or intermediate care facility for the mentally and physically disabled is not for use by the general public.

  30. General Public Use Discussion • Signing MOU’s • Waitlist and Preference Establishment • Building housing/renting to specific populations • Referral services • Federal Fair Housing MOU • Citizenship • General Fair Housing Issues

  31. 8823 Form 11i Available Unit Rule (AUR) Violations of the Available Unit Rule Under Section 42(g)(2)(D)(ii) This category is used to report violations of the Available Unit Rule (AUR) ; i.e., Situations where an initially qualified household’s income subsequently rises above 140 percent of the current income limit and a household that is not income qualified moves into a unit of comparable or smaller size in the low-income building.

  32. AUR Discussion If an over-income unit is vacated, it will be treated as an over-income unit subject to the Available Unit Rule until the effective date of the tenant income certification for the new income-qualified household that moves into the unit or the unit is rented to a non-qualifying tenant. Next Available Unit Defined The “next available unit” is any vacant unit, or any unit that is subsequently vacated in the same building, of a comparable or smaller size. Treas. Reg. §1.42-15(c) states that a unit is not available when the unit is no longer available for rent due to contractual arrangements that are binding under local law.

  33. 8823 Form 11j Vacant Unit Rule Violation(s) of the Vacant Unit Rule Under Reg. 1.42-5(c)(1)(ix) This category is used to report violations of the Vacant Unit Rule (VUR); i.e., situations where an owner failed to make reasonable attempts to rent that unit, or the next available unit of comparable or smaller size, before renting units to tenants not having a qualifying income.

  34. VUR Discussion Noncompliance occurs when the owner does not make reasonable attempts to rent vacant low-income units and rents units to non-qualifying tenants. If the Vacant Unit Rule is violated, all vacant units previously occupied by qualified households lose their low-income status and are not considered qualified units. The date of noncompliance is the date the first low-income tenant moved out of the now vacant units.

  35. 8823 Form 11k EUA Owner Failed to Execute and Record Extended Use Agreement Within Time Prescribed by Section 42(h)(6)(J) This category is used to report buildings for which an extended low-income housing commitment (extended use agreement) is not in effect; i.e., the extended use agreement is not executed, is not recorded, or fails to meet the requirements of IRC §42(h)(6). No credit is allowable for a building in a year unless an extended use agreement is in effect at the end of the year. See IRC §42(h)(6)(A). If it is determined that an extended use agreement was not in effect at the beginning of the year, IRC §42(h)(6)(J) permits the owner to correct the problem within one year from the date of the determination.

  36. EUA Discussion • Owner must agree to and sign REUA with OHCS • Older properties may be exempt (pre-1989)

  37. 8823 Form 11L FT Students Low-Income Units Occupied by Nonqualified Full-Time Students This category is used to report LIHC units occupied by nonqualified full-time student households. A unit is not considered to be occupied by low-income individuals if all the occupants of such unit are full-time students, no one of whom is entitled to file a joint return.

  38. FT Student Discussion • Units comprised of full-time students (no one of whom is entitled to file a joint return) do not qualify as low-income units. However, there are exceptions as outlined in IRC §42(i)(3)(D). • Monitored on continual basis-no grandfathering • Tip: Watch Roommate Situations Closely

  39. 8823 Form 11m UA Owner Did Not Properly Calculate Utility Allowance This category is used to report noncompliance with the utility allowance requirements outlined in Treas. Reg. §1.42-10. An allowance for the cost of any utilities, other than telephone, cable television, or Internet, paid directly by the tenant(s) and not by or through the owner of the building is included in the computation of gross rent under IRC §42(g)(2)(B). A separate estimate is computed for each utility and different methods can be used to compute the individual utility allowances. The utility allowance is computed on a building-by-building basis. The maximum rent that may be paid by the tenant must be reduced by utility allowance(s) obtained.

  40. UA Discussion • Know the methods allowed for the funding involved PER BUILDING • Update in a timely manner • Leave a buffer with rents • Request approval to change methods as applicable • Communicate with your PHA about updates • RUBS is not allowed (must be included in gross rent) • Know sub-metering requirements

  41. 8823 Form 11n Response Agency Reviews Owner has Failed to Respond to Agency Requests for Monitoring Reviews This category is used to report owners of low-income projects that failed to respond to agency requests for monitoring reviews. Under the inspection provision Treas. Reg. §1.42-5, the state agencies must have the right to perform an on-site inspection of any low-income housing project at least through the end of the 15-year compliance period for the buildings in the project. State agencies (or their representatives) must conduct on-site inspections, inspect units, and review income (re)certifications, supporting documentation, and rent records for the tenants in those units, and otherwise meet the provisions listed in Treas. Reg. §1.42-5(a)(2)(i)(A), (B), (C), and (D).

  42. Review Discussion An owner is in compliance when requests for site visitations and access to tenants’ records are honored without unreasonable postponements. An owner is out of compliance when requests for site visitations or tenant file inspections are denied or unreasonably postponed. A state agency should accommodate the owner’s valid needs to reschedule a site visit or tenant file review, but should not allow owners to delay or circumvent compliance monitoring reviews. The date of noncompliance is the earlier of the date (1) the owner refused to allow a site visitation or access to tenants’ records or (2) first postponed the site visit or access to tenant’s records.

  43. Updated Monitoring Regulations On February 26, 2019 the Internal Revenue Service (IRS) issued final regulations for Housing Credit compliance monitoring, which replace the temporary compliance monitoring regulations under which OHCS has been operating since 2016. The new regulations make several significant changes to compliance monitoring requirements, including in some cases increasing the number of units in a property that OHCS will need to monitor and reducing the inspection notice requirement (for both physical and file inspections) from 30 to 15 days.

  44. 8823 Form 11o Transient Low-Income Units Used on a Transient Basis This category is used to report noncompliance when units have been used on a transient basis. Generally, the length of the initial lease agreement determines whether use is transient. A unit is nontransient if the initial lease term is six months or more.

  45. Transient Discussion A unit is in compliance with this requirement if the initial lease term for each tenant is at least six months. The presence of a six month initial lease is the customary evidence used to document the owner and tenant’s intent to enter into a nontransient rental agreement A unit is out of compliance if: 1. no lease is on file for the tenant, or 2. the tenant’s initial lease term is not at least six months.

  46. Lease Issues • Easy to make mistakes with dates • Lease Break Fees Q. What about people who move during first six months? A. Did they have a lease?

  47. 8823 Form 11p Participating Building Project is No Longer in Compliance Nor Participating in the Program This category should be used to notify the Internal Revenue Service that a building is entirely out of compliance and is no longer participating in the program.

  48. Participating Discussion IRC §42(h)(6)(D) requires a property owner to commit to the low-income housing program for a minimum of 30 years. The commitment is documented as a restrictive covenant against the property and is recorded against the property as a deed restriction governed by state law. Commonly know as “extended use agreements”, these covenants are agreements between the owner and state agency. Consideration should be given to enforcing the agreement through a civil court proceeding. However, when a building or project is removed from the program, state agencies have discretionary authority to release the extended use agreement and remove the deed restriction. *Oregon Cannot Release

  49. 8823 Form 11q Other Qualified Nonprofit Organization Failed to Materially Participate IRC §42(h)(5) requires that each state set aside at least 10% of its state housing credit ceiling for allocations to projects in which qualified nonprofit organizations own an interest, and materially participate in the development and operation of the projects. For purposes of this allocation, a nonprofit organization must have an ownership interest in the low-income housing project throughout the 15-year compliance period and materially participate in the development and operation of the project. Operation must be on a regular, continuous, and substantial basis

  50. Not Reportable Failure to comply with a state agency’s more restrictive requirement is not a reportable noncompliance event. • State-Set Asides (30% units for example) • OAHTC issues • 100% LIHTC First Annual Recertification's

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