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Does LIHTC Income Verification Conform to HUD?

Published by James R. Kroger and Stephanie Naquin on Thursday, November 2, 2017

Journal cover November 2017   Download PDF

Q:Is LIHTC income verification required to conform to HUD?

A:No. LIHTC income verification is not required to conform to HUD. 

LIHTC and Section 8

The Low-Income Housing Tax Credit (LIHTC) program’s approach to income determination is modeled after Section 8. When Congress created the LIHTC program, it used the same income-eligibility criteria as Section 8. The Internal Revenue Service (IRS) has language in Internal Revenue Code (IRC) 142(d)(2)(B) and by reference from IRC 42(g)(4) that says “income of individuals and area median gross income shall be determined by the Secretary in a manner consistent with determinations of lower income families and area median gross income under section 8 of the United States Housing Act of 1937.”  Treasury Regulation Section 1.42-5(b)(1)(vii) has similar language that states, “Tenant income is calculated in a manner consistent with the determination of annual income under section 8 of the United States Housing Act of 1937 (“Section 8”).”

But what does it mean to determine annual income in a manner consistent with Section 8? It seems clear that the word “determined” means what type of income and assets to include or exclude, and how to calculate/annualize certain types of income, but it does not necessarily mean how to verify income.

The determination of income under Section 8 of the U.S. Housing Act of 1937 is found in 24 CFR Section 5.609 Annual Income. The CFR is the federal reference for what income/assets are included in tenant income for Section 8 and how to annualize that income. The U.S. Department of Housing and Urban Development (HUD) created HUD Handbook 4350.3 for administrators of the Section 8 program based on 24 CFR.  HUD Handbook 4350.3. Section 1 of Chapter 5 is the authority for what income/assets are included in tenant income for LIHTC and how to annualize that income. 

Verification Requirements

Although LIHTC and Section 8 use the same rules for what income/assets are included in tenant income, how to verify income and assets is where the two programs can be different, and LIHTC income verification is not required to conform to HUD.  HUD Handbook 4350.3, Chapter 5, Section 3, prescribes in detail how to verify income for the Section 8 program. The processes and procedures outlined in Section 3 are robust and often used for LIHTC properties. However, these income verification procedures are not a requirement of the LIHTC program. As an example of nonconformity in verification requirements, both the LIHTC and Section 8 programs include employment as a source of income, but the requirement that the employment be verified using HUDs Enterprise Income Verification (EIV) system is specific to Section 8. In fact, LIHTC administrators, such as state agencies, are prohibited from accessing EIV income information.

The LIHTC allocating agency is responsible for creating procedures in monitoring compliance with the LIHTC program and, if through those monitoring activities, noncompliance is identified, that noncompliance is reported to the Internal Revenue Service (IRS) on IRS Form 8823. As a resource for agencies to understand noncompliance, the IRS published the Guide for Completing Form 8823. The 8823 guide is a collection of authoritative references, with explanations and examples to aid the agency in understanding noncompliance for IRS purposes. Chapter 4, Income Limits, repeats the same information found in 24 CFR Section 5.609 and HUD 4350.3 Chapter 5 Section 1 related to sources of income, but also discusses acceptable documentation for the LIHTC program. For instance, Section 8 requires that for a household’s total net assets, each individual asset’s value must be verified. Under LIHTC, when the household’s total net assets are less than (or equal to) $5,000, the household can self-certify to the value of the asset(s) to satisfy the documentation requirement. This is another example of LITHC verification not conforming to HUD Handbook 4350.3. 

The IRS indicated in Newsletter #54 that HUD 4350.3 verification rules don’t necessarily apply to LIHTC:

Q2: Must owners obtain documentation of income as described in Chapter 5, Section 3, of the Handbook? 

A2: While the documentation requirements described in handbook are sufficient for IRC §42 purposes, Handbook 4250.3, Chapter 3, Section 3, Verification, is not the authority for documentation requirements.

IRS Newsletter #54 also says that: 

“Third Party Verification – The HUD Handbook includes a helpful discussion of third party verification on pages 5-54 through 5-56.”

“State Agency Requirements – The state housing agencies can require taxpayers to obtain specific documentation of income based on local practices and circumstances. Taxpayers are advised to consult with the state housing agency regarding documentation requirements for income certifications.”

When verifying sources of income and assets, there are several different methods. The most commonly preferred method is third-party verifications, which is when a verification form is sent directly to and received back from a third party. An example of this would be faxing a verification of employment form to the human resources division of the employer, who completes the form and faxes it back. These types of verifications are obtained by use of fax, email, mail or Internet. In each case, the delivery method must be documented (e.g., the fax header must be present) to authenticate the verification. 

Another method is first-hand verification. An example of this would be pay stubs as verification of the employment income. 

An agency can also require specific types of documentation. For example, when verifying employment income, in Nevada, the standard is to obtain third-party verifications; and only after attempts have been made and/or the information received is incomplete, can pay stubs be used. In Texas, pay stubs are acceptable without having to first make attempts at third-party verifications. In California, three months of consecutive pay stubs and a third-party verification are required. 

It is important to understand the compliance rules for the state agency that regulates your property because each state has specific rules on how to satisfy income verification requirements for the LIHTC program.  State agencies monitor compliance for the LIHTC program and report noncompliance to the IRS, so failure to document income in the manner prescribed by that agency could result in disallowance of tax credits or even recapture of tax credits. Please contact a Novogradac professional to help you with compliance issues that are specific to your state agency. 

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