Determining the Depth of the State Agency s Inspection/Review
Depth is the extent to which an issue of potential noncompliance is developed. It demonstrates the degree of intensity and thoroughness applied to make a determination of noncompliance. State agencies must use judgment to determine the depth required to satisfactorily develop an issue of noncompliance. The following factors should be considered:
The type and reliability of evidence available or expected,
Complexity of the issue, and
It is important to obtain sufficient evidence for evaluating the owner’s compliance with IRC §42 requirements. Determining the proper amount of evidence to accumulate is a judgmental decision. Factors to consider include the risk that the owner may have made errors that are individually or collectively material and the risk that tests (such as sampling) will fail to uncover material errors.
Consideration of Taxpayer Due Diligence
For most taxpayers, voluntary compliance consists of preparing an accurate tax return, filing it timely, and paying any taxes due. Compliant behavior can be demonstrated when a LIHC property owner exercises ordinary business care and prudence in fulfilling its obligations. Due diligence can be demonstrated in many ways, including (but not limited to) establishing strong internal controls (policies and procedures) to identify, measure, and safeguard business operations and avoid material misstatements of LIHC property compliance or financial information. Internal controls include:
Separation of duties,
Adequate supervision of employees,
Management oversight and review (internal audits),
Third party verifications of tenant income,
Independent audits, and
State agencies gather information to determine the owner/taxpayer’s compliance with IRC §42. This determination must be made on the basis of all available facts, including facts supporting the owner’s position. Evidence is something that tends to prove a fact or point in question.
Owners have the right to expect that the information they provide will be safeguarded and used only in accordance with the law. To promote and maintain owners’ confidence in the privacy, confidentiality, and security protections provided by the state and IRS, the following principles should be followed.
Revised October 2009