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Guide for Completing Form 8823 - page 25 / 197





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Expanding the Sample Size

Example 1: Applying Tenant File Review Results

A state agency conducts a tenant file review and physical inspection of a 100% LIHC single building project with 100 units. The LIHC associated with each unit is $3,000. Twenty units are inspected and the associated tenant files are reviewed. Various noncompliance issues were identified for fifteen, or 75 percent, of the twenty sampled units.

The IRS can make an LIHC adjustment of $45,000 (15 units x $3,000) for the year of the review, with a recapture of $15,000 plus interest for each of the prior years of the credit period. Although the sample results indicate significant noncompliance, the results cannot be projected to the entire population; i.e., the IRS cannot conclude that 75 of the 100 units are out of compliance and, therefore, disallow the entire LIHC because the taxpayer did not meet the minimum set-aside.

In the event that extensive noncompliance is identified, state agencies should consider expanding the number of units inspected/files reviewed beyond the 20 percent sample required under Treas. Reg. 1.42-5(c)(2)(ii). Circumstances warranting consideration of expanding the sample of LIHC units reviewed include (but are not limited to):

  • 1.

    Poor internal controls (significant risk of error)

  • 2.

    Multiple problems

  • 3.

    Significant number of nonqualified units

  • 4.

    Significant number of households are not income-qualified

  • 5.

    Credible information from a reliable source

Determining the Scope of the State Agency s Inspection/Review

Large, Unusu and Questionable

Items (Materiality)


Large, unusual, or questionable items (LUQ’s) may be material in determining whether noncompliance exists, and thus affect the scope of the state agency’s inspection/review. Some factors to consider when determining the materiality of items include:


Comparative nature of the issue – two of one hundred of a building’s rental units out of compliance for a month is not as important as a project failing the 40/60 minimum set- aside.


Absolute nature of the issue – violations of the physical conditions standards should be investigated thoroughly whether one or one hundred units are impacted.


Inherent nature of the issue – a permanent decrease in the eligible basis of the property is more significant than two units that are not available for rent for two months.


. Evidence of intent to mislead – this may include missing, misleading or incomplete


5. Extenuating circumstances – the issue cited is very temporary or in the process of being fixed at the time of inspection.


Revised October 2009

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