How to Correct Common Noncompliance Triggers

No one wants to find out that his tax credit site has been cited for noncompliance, but if your state housing agency has issued the owner a Form 8823, your first reaction may be to panic. Don't.

“It's not the end of the world,” says Barbara Crook, compliance director for Affordable Housing Support Services, an affordable housing compliance consulting firm in Littleton, Colo. “Most likely, these are errors that can be fixed. The state agency usually will give you between 30 and 60 days to correct it, depending on the type of noncompliance.”

Form 8823 filings are commonly a result of omission, rather than deliberate actions, she says. “But regardless of how the error occurred, you're responsible for getting it back on track.”

Correcting Site Owner Errors

The most difficult issue to correct is dealing with an over-income household, says Crook. If the household only appears over-income due to poor calculations, recalculate the income and complete a correcting certification; make sure the income and asset verification is current as of the household move-in date.

“But if the household is legitimately over-income because site staff did not ask the right questions, or did not follow through and calculate a second job or another source of income that was disclosed, it is an owner error,” Crook says. The first step to correct this type of error is to go back and verify the additional sources of income.

“Hopefully, the household is still eligible with the additional income,” she says. “If not, then you would have to provide that tenant with an incentive to move from the unit, because the IRS would consider that unit noncompliant from the day the household moved in, until the unit is reoccupied by a qualified household.”

Incentives usually involve money, such as paying the household a certain amount to move, a month's rent at a new place, or their moving expenses.

Dealing with Tenant Fraud

Demonstrating due diligence during certification is the best method for preventing tenant fraud. However, if you find out that a resident has deliberately misrepresented his income level, student status, household composition, or other eligibility requirements, you need to remove the household by serving a notice to vacate. Site owners and managers can protect themselves against fraud or the misrepresentation of information by requiring residents to sign a lease agreement compliance addendum and a full-time student rules addendum (see our Model Agreement: Put Safeguards in Place to Protect Against Tenant Fraud).

“These addenda will give you grounds for moving people out of the units because they provided false information,” Crook says.

Implement Procedures to Prevent Errors

Once you have taken the steps to correct the noncompliance, it's important to implement procedures to ensure that it does not recur.

“In Colorado, property owners are given an opportunity to send a letter to the IRS along with the state housing agency's notice that the noncompliance was cured, explaining what new procedures are in place to make sure that noncompliance will not happen again,” Crook explains. “It is an affirmation that the owner takes noncompliance seriously, and that the noncompliance that triggered an 8823 was not intentional.”

The best way to maintain consistency in tax credit compliance is to establish a separate third-party review of household files, whether through a consultant or another staff member in the management office.

Insider Source

Barbara Crook: Compliance Director, Affordable Housing Support Services; (303) 798-6234; barbaracrook@ahsscolorado.com.

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