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Keeping an Eye on the LIHTC Noncompliance Correction Period
In accordance with Treasury Regulation Section 1.42-5, at least once every three years, the state housing finance agency (agency), will conduct a review of the tenant certifications and a physical inspection of low-income housing tax credit (LIHTC) properties. Every year, the owner of a LIHTC project must certify to certain provisions of Internal Revenue Code (IRC) Section 42, known as the annual owner certification (AOC).
With both regular occurring reviews and annual certifications, any events of noncompliance results in a correction period. That initial correction period can be up to 90 days and extended to six months with good cause. It is paramount that any event of noncompliance identified is responded to before the end of the correction period. After all, if IRS Form 8823 is issued (by a state housing agency for notification of noncompliance), it is a much better position to be in to have the events reported as corrected at the same time the event, itself, is reported.
What to Expect?
The correction period is defined under Treas. Reg. Section 1.42-5(e)(4). After the agency conducts a review of the tenant certifications, a physical inspection and/or the AOC, the notice of noncompliance is to be promptly provided to the owner.
While the agency often also notifies the site staff and the property management company, their obligation is to notify the owner. As such, it is important to ensure that the correct owner contact information is on file. This includes not only how to reach the owner (e.g., current mailing address or email) but also ensuring that the specific contact identified is someone who is responsible disseminating information and responding. Within 45 days of the close of the correction period, the agency will issue the IRS Form 8823 reporting any noncompliance, whether corrected or not, to the IRS.
Understanding the Noncompliance
In order for property owners to respond, it is important to understand what the actual issue is. Luckily, a roadmap to understanding each category of noncompliance can be found in the Guide to Completing IRS Form 8823 (Guide). There are 17 categories of noncompliance on the IRS Form 8823 and each has a corresponding chapter in the Guide that frames what it means to comply, what would trigger an event of noncompliance and how to correct if noncompliance occurs.
For example, consider a situation in which the gross rent for a unit exceeded the applicable rent limit because a utility allowance was not timely implemented. This would result in categories 11g-Gross rent(s) exceeds limit and 11m-Owner did not properly calculate utility allowance being selected on the Form 8823. To understand these categories, you would look to both Chapters 11 and 18.
Likewise, if a unit was occupied by a household that was not income-eligible at move in, it would result in category 11a- Household income above income limit upon initial occupancy selected on Form 8823. To understand these categories, you would look Chapter 4.
Conversely, consider when a household’s income increases to above 140% of the applicable income limit and is over-income and the next available unit in the building of smaller/comparable size was rented to a non-restricted household. This would result in category 11i-Violation(s) of the Available Unit Rule under section 42(g)(2)(D)(ii) selected on the Form 8823. To understand these categories, you would look to Chapter 14.
See the table below for information on categories of noncompliance.
CATEGORIES OF NONCOMPLIANCE
|11a||Household income above income limit upon initial occupancy||4|
|11b||Owner failed to correctly complete or document tenant’s annual income||5|
|11c||Violation(s) of the UPCS or local inspection standards including casualty losses||6|
|11d||Owner failed to provide annual certifications or provided incomplete or |
|11e||Changes in Eligible Basis or the Applicable Percentage||8 and 9|
|11f||Project failed to meet minimum set-aside requirement||10|
|11g||Gross rent(s) exceeds limit||11|
|11h||Project not available to the general public||12|
|11i||Violation(s) of the Available Unit Rule under section 42(g)(2)(D)(ii)||14|
|11j||Violation(s) of the Vacant Unit Rule under Reg. 1.42-5(c)(1)(ix)||15|
|11k||Owner failed to execute and record extended-use agreement within time prescribed by section 42(h)(6)(J)||16|
|11l||Low-income units occupied by nonqualified full-time students||17|
|11m||Owner did not properly calculate utility allowance||18|
|11n||Owner has failed to respond to agency requests for monitoring reviews||19|
|11o||Low-income units used on a transient basis||20|
|11p||Building is no longer in compliance nor participating in the section 42 program||21|
|11q||Other noncompliance issues||22 and 23|
Source: Guide to Completing IRS Form 8823
Read the Notice
Thoroughly reading the notice of noncompliance that the agency issues before starting to act to correct is key for a successful response. The notice will often prescribe specific documents that the agency wants to see in order to perfect or correct the event of noncompliance.
What if I do not agree?
That is OK! If, upon receipt and review of the notice, you disagree with or are unclear about the reason an event was cited or the documents were requested to be corrected, just ask. In fact, that is encouraged when anything is unclear, rather than making a guess as to what might be responsive or choosing an alternate form of response when a specific action has been responsive. After all, agency representatives are just people–and people make mistakes. But be sure to initiate the conversation with the agency before the end of the correction period. What is not appropriate is a complete disregard of any part of the notice because you do not agree. This will result in an uncorrected Form 8823 being issued at the end of the correction period. Once the correction period ends and the Form 8823 is issued, it becomes nearly impossible to “walk-back” the 8823. In other words, once the correction period concludes, the agency’s hands a largely tied in what/how they are to proceed.
Things to Remember
From April 2020 through September 2021, the requirement for a state agency to conduct a review of the tenant certifications and a physical inspection was suspended. However, this changes Oct. 1. If a tenant certification review and/or a physical inspection was completed in October, November or December 2018 (three years ago), that respective review/inspection is due in October, November or December 2021. (Check out the Washington Wire column in this edition of the Journal for more information.)
While the correction period represents the time frame for an owner to correct events of noncompliance before an agency can issue the Form 8823, still be aware of the year-end. A response may not be due to the agency until sometime in 2022, but to mitigate a reduction in the building’s qualified basis for 2021, events need to be corrected before Dec. 31.
For example, the agency last conducted a review of the tenant certifications Dec. 1, 2018, and would next be by Dec. 31, 2021. The agency conducts the review Nov. 15 and provides prompt notice of noncompliance Nov. 26 that prescribes a 60-day correction period that concludes Jan. 25, 2022. Unit 101 moved in Feb. 15, 2021, and during the review, the agency filed an event of noncompliance under category 11a-Household income above income limit upon initial occupancy.
For this not to result in a reduction in that building’s qualified basis that triggers a recapture event and disallowance of earned credits for 2021, the event would need to be corrected before Dec. 31, even though the response to the agency is not due until Jan. 25, 2022. This would still result in a Form 8823 being issued, but because the date of noncompliance and the date the event was corrected are within the same year, it would not result in a reduction in qualified basis for 2021. Often, we tend to conflate a reduction in qualified basis as only occurring when a Form 8823 is issued with how a building’s annual credit calculation is actually calculated. While waiting until Jan. 15, 2022, to correct the event is perfectly compliant and will also result in a Form 8823 being executed in the same manner as when the event was corrected before Dec. 31, 2021, the difference is that doing so before Dec. 31, 2021, mitigates credit loss and doing so after Dec. 31, 2021, does not.
Unfortunately, this process is often experienced as us (the owner) against them (the agency). It should be about how partners in compliance can best navigate the correction period. Understanding what to expect, how to navigate federal resources, reading the notice and initiating communication when necessary are all excellent ways to be comfortable in understanding your role in the process.
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