Implement Approval Procedure to Prevent Over-Income Move-Ins

There’s more at stake when you approve applicants for units in tax credit buildings than when you approve applicants for other assisted sites. That’s because a move-in mistake on a tax credit site can result in an immediate loss of tax credit dollars for owners, possibly jeopardizing any management contracts between an owner and a management company.

Management companies reduce the risk of moving in ineligible applicants by requiring site managers to get approval from the main office or headquarters. We’ll give you a Model Policy: Have Site Managers Get Main Office Approval of Tax Credit Move-Ins to help minimize the chances of a move-in mistake.

Costly Errors on Tax Credit Unit Applications

Your management contract probably requires you to use your best efforts to prevent errors that could lead the IRS to take back tax credits claimed by the owner. But it’s easy for site staff to make a mistake on an application for housing in a tax credit unit. The staffer may forget to verify an applicant’s income. Or he may inadvertently use the wrong income limit.

In a Section 8 or other type of assisted property, a move-in mistake may lead, at worst, to loss of subsidy for a single unit. Similarly, loss of tax credits for a single unit could occur at a tax credit site, but the recapture of tax credits would be magnified by the accelerated portion of credits for all prior taxable years. For example, suppose that in year 6 of the compliance period, an ineligible household lived in a unit for 12 months. This was reported to the IRS. If the IRS determines that this is serious enough to warrant recapture, 100 percent of the credit is forfeited for the unit for year 6 and one-third of the credits previously claimed for the unit are recaptured for years 5, 4, 3, 2, and 1—along with interest and penalties.

Unlike a loss of subsidy for a single unit at another type of assisted site, a move-in mistake that implicates the minimum set-aside at a tax credit site could potentially jeopardize tax credits claimed for an entire building if the owner determined that the minimum set-aside was to be met building by building. For a project or building to qualify for credits, the minimum set-aside must be met by a deadline. If the minimum set-aside is not met by the initial compliance date, no tax credits are allowed for this project. If the minimum set-aside is met by the initial compliance date, but is violated thereafter, all low-income units are subject to recapture.

For example, suppose you’re leasing up a “40-60” building with 20 units. That means eight of the 20 units (40 percent) must be leased to qualified low-income households (households with income below 60 percent of the area median income). Assuming in year 1 that you moved in seven eligible applicants, and, unwittingly, one ineligible applicant. If a state finance agency audit uncovers the mistake in year 5, the agency will notify the IRS and the owners will lose tax credits for the entire building going back to year 1.

Benefits of Approval Procedure

Requiring site staff to forward completed application packages, with supporting verifications, to the main office for approval prior to move-in has two benefits:

1. Cuts risk of move-in mistakes. The main benefit of a move-in approval procedure is to cut the risk of a mistake. Additional eyes and systematic checks on an application package means mistakes are less likely to fall through the cracks.

2. Trains staff. Another benefit of the policy is that it helps train new staff who are liable to make common mistakes. A good pre-move-in approval policy may catch verification mistakes such as a site manager taking a waiter’s word that his tip income is only $100 a year. If such a mistake is made and caught at the main office, headquarters can send the application back to the site manager with a request for more information from the applicant. After this happens once or twice, the site manager will learn not to repeat the mistake.

Set Up Five-Step Move-In Approval Procedure

Your pre-move-in approval policy and procedure, like our Model Procedure, should direct the site staff to take five steps before moving in an applicant to a tax credit building.

1. Site staff perform initial review. You policy and procedure should require site staff to perform initial eligibility reviews. This includes checking family size, income, income from assets, and whether the applicants meet your occupancy and credit requirements.

2. Send application and supporting documents to main office. When a unit is available, the site manager should send the application and supporting documents to the main office. The manager should deliver, electronically or otherwise, the application and supporting documents to the person in charge of tax credit compliance for your company. Depending on your company, this may be the tax credit officer, occupancy specialist, or property supervisor.

Your procedure should require the site manager to make sure that the verifications are current. If the verifications are stale, the manager should get updated verifications.

3. Get written main office approval. It’s a good idea to process applications as promptly as possible, so your policy should say how long the office will take to approve or deny the application. This way, if there’s a delay, the site can call and follow up. To avoid confusion, it’s a good idea to give the main office’s decision in writing.

4. Follow appropriate acceptance or rejection procedures. After the person in charge of tax credit compliance at the main office has reviewed the application package and has made a decision, the site staff should simply follow the acceptance or rejection procedures set in place. The approval policy and procedure should be applied to all applicants within a building that contains tax credit units, whether market-rate, Section 8, or otherwise. Non-tax credit unit leasing affects tax credit compliance when you have to comply with the next available unit rule.

5. Make failure to comply grounds for termination. To emphasize the importance of following the policy, make noncompliance or deviation from the policy grounds for termination.