occupancy based on local health, safety, and building codes or whether the buildings and units satisfy the uniform physical condition standards established by HUD. 2
The state agency is required to review the low-income certifications, the documentation supporting the certifications (and recertifications3), and the rent records for the tenants in the units selected for the physical inspection. 4 Therefore, the state agency should be reviewing the initial income certification if the tenant moved in within the last year or the most recent income recertification.
In addition, state agencies must report any change in the applicable fraction (such as converting LIHC units to market rate units) or eligible basis (such as converting common area to commercial space) that results in a decrease in the qualified basis as noncompliance.
Noncompliance issues identified and corrected by the owner prior to notification of an upcoming compliance review or inspection by the state agency need not be reported; i.e., the owner is in compliance at the time of the state agency’s inspection and/or tenant file review. Small Business/Self-Employed (SB/SE) considers the date of the notification letter a “bright line” date comparable to the rules for requesting a PLR or the disclosure on From 1040X that an amended tax return is being filed after being audited by the IRS or subsequent to notification that it will be audited. See Form 1040X, line B.
The review (or sampling) of 20 percent of the LIHC units in a project and the associated tenant files is required under the Treasury regulations. The purpose is to estimate the compliance level of all the tenant income (re)certifications by providing a “snap shot” view of the owner’s activities and compliance level at a specific moment in time. Sampling reduces the labor costs, and enables state agencies to meet time constraints when dealing with large LIHC properties.
Selecting a Sample
A random selection of tenant files or LIHC units is required. The method of choosing the sample of files or units to be inspected must not give the owner advance notice of which units and tenants records are to be inspected and reviewed5. There is no advantage to selecting different units over the 15-year compliance monitoring cycle.
If the sample includes a currently vacant unit, then the last (re)certification for the last tenant should be reviewed. The “snap shot” is indicative of current compliance.
Interpreting the Results
The IRS uses the results of the state agencies’ reviews as an indicator of the owner’s level of compliance with IRC §42 requirements. If audited, the IRS can also use the results to make adjustments to the LIHC on a unit-by-unit basis as identified on Form 8823. However, the IRS cannot project the results to the entire population of LIHC units6.
2 3 See Treas. Reg. 1.42-5(d)(2). Treas. Reg. 1.42-5(c)(1)(iii) refers to an “annual income certification” which for clarity purposes is often referred to as a “recertification.” See Treas. Reg. 1.42-5(c)(2)(ii)(A) and (B). Treas. Reg. 1.42-5(c)(2)(iii). The IRS has specific requirements for using sampling techniques as part of an income tax audit. A state agency is not required to use these more stringent techniques for random selection and sample size when conducting a compliance review. 4 5 6
Revised October 2009