Guide for Completing Form 8823, Low-Income …

1 Audit Technique Guide This material was designed specifically for training purposes only. Under no circumstances should the contents be used or cited as authority for setting or sustaining a technical position. Training 23092-001 (Rev. 01-2011) Guide for Completing form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition The scope of this Guide is limited to guidelines for preparing form 8823 for submission to the IRS. Taxpayers are responsible for evaluating the tax consequences of noncompliance with IRC 42. Prepared by Internal Revenue Service Small Business/Self-Employed Division Originally drafted in collaboration with the National Council of State Housing Agencies and It s member States Housing Credit Agencies Questions or comments regarding the Guide should be addressed to Grace Robertson at or by mail at: Internal Revenue Service Attn.

2 Grace Robertson, C7-161 5000 Ellin Road Lanham, MD 20706 Previous Revisions January 2007 October 2009 Revised January 2011 Revised January 2011 iiTable of Contents Chapter Title 1 Introduction Exhibit 1-1, Reports of Noncompliance ( form 8823) Process Map & Explanations Exhibit 1-2, form 8823 and Instructions Exhibit 1-3, IRS Noncompliance Notification Letter 2 Instructions for Completing form 8823 3 Guidelines for Determining Noncompliance 4 11a Household Income Above Income Limit Upon Initial Occupancy Exhibit 4-1, CCA 2009090416224806 5 Category 11b Owner Failed to Correctly Complete or Document Tenant s Annual Income Recertification 6 Category 11c Violation(s)

3 Of the UPCS or Local Inspection Standards Exhibit 6-1, Checksheet for the Physical Inspection of LIHC Properties Exhibit 6-2, Notification Letter No Violations Noted Exhibit 6-3, Notification Letter Noncompliance Exhibit 6-4, Notification Letter Critical Violations 7 Category 11d Owner Failed to Provide Annual Certification or Provided Incomplete or Inaccurate Certifications 8 Category 11e Changes in Eligible Basis 9 Category 11e Changes in the Applicable Percentage 10 Category 11f Project Failed to Meet Minimum Set-Aside Requirement 11 Category 11g Gross Rent(s) Exceed Tax Credit Limits 12 Category 11h Project not Available to the General Public 13 Category 11h Project not Available to the General Public (Notifications of Fair Housing Act Administrative and Legal Actions) Exhibit 13-1, HUD s Regional Offices Exhibit 13-2, Memorandum of Understanding Among the Department of the Treasury, the Department of Housing and Urban Development, and the Department of Justice Exhibit 13-3, Sample Letter to Notify Building Owner of Potential Fair Housing Act Violations 14 Category 11i Violations of the Available Unit Rule Under Section 42(g)(2)(D)(ii)

4 15 Category 11j Violation(s) of the Vacant Unit Rule under Reg. (c)(1)(ix) Revised January 2011 iii16 Category 11k Owner Failed to Execute and Record Extended Use Agreement Within Time Prescribed by Section 42(h)(6)(J) 17 Category 11l Low-Income Units Occupied by Nonqualified Full-Time Students Exhibit 17-1, Student Status Verification 18 Category 11m Owner Did Not Properly Calculate Utility Allowance 19 Category 11n Owner has Failed to Respond to Agency Requests for Monitoring Reviews 20 Category 11o Low Income Units Used on a Transient Basis 21 Category 11p Project is No Longer in Compliance Nor Participating in the LIHC Program 22 Category 11q Other Noncompliance Issue Qualified Nonprofit Organization Failed to Materially Participate 23 Category 11q Other Noncompliance Issues 24 Line 13 Building Disposition Exhibit 24-1, Explanation of Credit Recapture Requirements Under IRC 42(j)

5 25 Miscellaneous Noncompliance Topics - Tenant Misrepresentation or Fraud - Owner/Taxpayer Fraud 26 Tenant Good Cause Eviction and Rent Increase Protection Revised January 2011 ivExplanations of Revisions 1. Asterisks used to identify revisions in the October 2009 version of the Guide have been removed and now reflect significant changes made for the January 2011 version of the Guide . 2. Changes have been made through the text to correct typing and formatting errors. These changes, which do not impact the meaning of the text, are not identified. 3. Chapter 1, Exhibit 1, Step 4: The text was updated to explain that a form 8823 must be filed with the IRS to report the correction of previously reported noncompliance (back in compliance) if corrected within three years after the end of the correction period.

6 4. Chapter 4: Page 4-1: The citation for nonmetropolitan areas in #1 of the list has been updated to reflect the correct Code section; , IRC 42(d)(5)(B)(iv)(IV). Page 4-14: Clarification that assets disposed of for less than fair market value within two years of the effective date of a tenant s initial certification or recertification, including assets placed in irrevocable trusts, are included as an asset in the determination of the tenant s income. Page 4-21: The list of items specific excluded from income now includes a separate line item for the value of food stamps (line #3). 5. Chapter 6: CCA 201042025 was added to the list of references.

7 6. Chapter 7, page 7-1: a note has been added to item #4 on the list to explain that for tax years ending after July 30, 2008, if all the Low-Income buildings in the project are 100% Low-Income buildings, owners are not required to complete annual tenant income recertifications. 7. Chapter 11, page 11-4: The second of three equations included in Example 1 has been corrected and now reads, $35,430 x .30 = $10, instead of $31,430 x .30 = $10, 8. Chapter 12, page 12-3: The first sentence of the second paragraph of Example 1 has been revised to read, Although each unit fell out of to reflect Treas. Reg. (c); , the unit is treated as a residential rental unit that is not a Low-Income unit.

8 9. Chapter 18: The Out of Compliance and Back in Compliance sections have been significantly expanded to provide additional discussion and examples. The text clarifies that determinations of noncompliance are made when gross rent exceeds the maximum gross rent limit as the result of computational or procedural errors. 1-1 Revised January 2011 Chapter 1 Introduction Background State Agency Responsibilities State and local housing credit agencies (herein referred to as state agencies ) are responsible for monitoring Low-Income housing credit (LIHC) properties for compliance with the requirements of Internal Revenue Code (IRC) 42; for example, health and safety standards, rent ceilings and income limits, and tenant qualifications.

9 State agencies perform desk audits, inspect housing, and review tenant When noncompliance is identified or the state agency becomes aware of a disposition of a building, the state agencies are required to notify the Internal Revenue Service using form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition. Briefly, a state agency performs a desk audit, conducts a site visit, or reviews the owner s tenant files and provides the owner with a summary report of its findings. If the report indicates noncompliance, the owner is expected to respond to the state agency within a maximum of 90 days to provide clarification or document that issues of noncompliance have been addressed.

10 Then, the state agency determines whether the owner was always in compliance, has corrected the noncompliance, or remains out of compliance. The time to correct the noncompliance may be extended up to a total of 6 months with state agency approval. Regardless of whether the owner remedied the noncompliance or remains out of compliance, a form 8823 must be filed with the IRS. If the state agency reports that the owner is out of compliance, the IRS sends a notification letter to the owner identifying the type of noncompliance reported on form 8823. The notification letter also states that the owner should not include any nonqualified Low-Income housing units when computing the tax credit under IRC 42 and that the noncompliance may result in the recapture of previously claimed credits.