Tax-credit housing: a new guide to compliance: the IRS's "8823 Guide" clarifies non-compliance and provides helpful examples for tax-credit housing providers.

After some years of gestation, the Internal Revenue Service (IRS) gave birth to the "8823 Guide" for the Low Income Housing Tax Credit Program. The guide is an effort to clarify non-compliance reported on IRS Form 8823. The IRS has prepared a document that states the service's expectations for program administrators and participants and provides helpful examples; this guide will be the topic of conversation for months. State agencies will be reviewing current policies and implementing changes. Owners and managers of tax credit communities should also carefully review the 8823 Guide and seek guidance from their state housing agencies.

The guide is intended for state housing finance agencies. The first three chapters of the guide discuss the compliance review process, which should be informative for owners, managers and state agencies. In the first bit of good news, the guide discusses non-compliance corrected before a compliance review. When an owner has corrected non-compliance before notification is received of a pending inspection, such corrected non-compliance should not be reported to the IRS.

For example, if during an audit of the community's files before a review an owner discovers an unsigned resident's income certification and has the resident sign it, then the state agency should not report the late recertification to the IRS. This is helpful for owners and managers, as it acknowledges that owner due diligence will not result in the issuance of an 8823. Owners, however, should be careful not to rest solely on this guidance. Patterns of non-compliance may still result in the issuance of 8823s or result in state-imposed penalties, such as restrictions on access to housing programs.

CHANGE IN HOUSEHOLD COMPOSITION

State agencies have taken many positions on changes in household composition; some states allow changes without a new certification while others require a certification. The IRS has now clarified household changes.

Addition of Members. According to the guide, "the addition of new member(s) to an existing low-income household requires the income certification for the new member of the household, including third-party verification. The new resident's income is added to the income disclosed on the existing household's resident income certification. If the "new" household is over income, managers must apply the Available Unit Rule. This guidance is interesting in that it does not specify whether it applies to all members who join a household (e.g. an infant) or only to adults. Requiring a certification for an adult joining a household would appear to make the most sense.

Decrease in Members. A decrease in household members, such as when a high school graduate leaves for the military, does not require a certification. Under those circumstances, the household should be recertified on the anniversary date of its last certification.

"Totem Pole" Changes. Another household composition issue with a history of debate is one occasionally referred to as the "totem pole." This is a situation in which the original qualifying members of a household no longer live in a unit. This often occurs in high-cost communities or those near colleges or universities. Two or more residents qualify for a unit as roommates. As time passes and roommates are replaced, a household may no longer contain any of the original members. The IRS, by requiring a new certification as a household changes composition, is attempting to address the issue of persons accessing tax credit housing who would otherwise not be qualified.

MOVES BETWEEN BUILDINGS

Some controversy has surrounded moves between buildings, particularly after many interpreted an answer in Revenue Ruling 2004-82 to allow moves between buildings without an income certification. According to the guide, households may move between buildings without a new certification. Units simply swap status.

Transfers are not limited to income-qualified households if the transfer is within the same building. Transfers to another building, however, are another matter. A household above 140 percent of the income limit cannot move to another building without creating a violation of the Available Unit Rule.

EMPLOYEE AND MODEL UNITS

As a benefit to both the apartment community and to the employee, many owners provide a unit to the manager or other employees, such as maintenance professionals. Arrangements for those differ. Some property managers provide apartment homes to employees free of charge and others offer homes for reduced rent.

The guide suggests that charging rent for an employee's home could be viewed as non-compliance. Payment of rent may imply the unit is not necessary to the project, which makes sense, as the purpose for allowing units to be offered to what may be a non-qualified household is to enhance the community by offering better service and security.

Owners who provide an apartment home to an employee and charge rent should talk with their tax or legal advisors to ensure the arrangement is acceptable. Property owners can lease units that were designated as employee units to low-income households if employees do not need the units.

Industry practices are changing regarding model units. Many communities are reducing their uses of models and are changing the nature of the furnishings. The use of models in the tax credit program has varied from state to state. According to the guide, models generally are acceptable, particularly during lease up. The rationale is that a model might, as a marketing technique, increase the viability of a project.

FULL-TIME STUDENTS 

Among the most discussed aspects of the tax-credit program is the prohibition on households consisting entirely of fulltime students. Much of the discussion normally focuses on the impact this has on families with children in grades kindergarten through senior year in high school. The guide does not provide any additional clarification. The discussion in the guide focuses specifically on the rule and omits any discussion about children in kindergarten through high school. The IRS has made it clear that any change to the rule can occur only through legislative action.

A discussion about the just cause ruling described in Revenue Ruling 2004-82 is included in the guide.

Unfortunately, the guide does not provide examples regarding how the just cause provision should be applied. For example, there is not a discussion about whether the rule applies to qualified households only or to all households.

OTHER CRITICAL ISSUES

Other critical issues discussed in the guide include:

* Utility allowances based on consumption are acceptable provided the state agency approves.

* The IRS is to be notified by the state agency of general partner changes.

* Third-party verifications are valid for 120 days.

* Recertifications not completed before a resident vacates a unit will not be considered non-compliance provided the manager documents attempts to complete the recertification.

* The IRS expects the state agency to issue 8823s for all UPCS violations. Having the resident partner with the manager to maintain the unit is a great strategy to avoid unnecessary 8823s.

* The immigration status of tax credit residents is not an issue in the tax-credit program. Owners should apply a consistent policy regarding the immigration status of residents.

The 8823 Guide is a readable and useable tool that will help owners and managers to focus their compliance efforts. The IRS should be applauded for its willingness to communicate openly with program stakeholders.

Brian Carnahan is Director of the Ohio Housing Finance Agency's Office of Program Compliance, where he oversees the monitoring of tax credit, Section 8 and HOME-funded projects. He can be reached at [e-mail].