Tips for a successful audit Preparing for a tax credit monitoring review NC Affordable Housing Conference November 1, 2011

Tips for a successful audit

Preparing for a tax credit monitoring review

NC Affordable Housing ConferenceNovember 1, 2011

Staying in ComplianceTo be in compliance:

• Units must be occupied by certified, income eligible households at restricted rents

• Be rented to non-transient households

• Maintain a condition suitable for occupancy

• Project must meet the minimum set aside

• Be available to the general public

The key to compliance is thorough documentation!

From Applicant to Tenant:A 4-Step Process

1. APPLY

2. VERIFY

3. QUALIFY

4. CERTIFY

A good Application or Questionnaire serves as your road map!• Lists all Household Members

• Lists the Student Status of all Household Members

• Asks specific questions about Income & Assets of all Household Members

Whose Income Is Counted?• Head/Co-head – ALL income• Spouse – ALL income • Other Adults – ALL income • Dependents Under 18 – Only unearned

income• Dependents FTS Over 18 – Unearned

income, plus up to $480 of earned income• Foster Child/Adult – Include income of

Foster Child/Adult as appropriate, but do not include payment for the care of Foster Child/Adult

• Live-In Aides – NO income is counted

Determining Annual Income:What’s Included?

• Net asset income

• Gross wages

• Unearned income

• Payment in lieu of earnings

• Recurring contributions

• Listed in HUD 4350.3 Exhibit 5-1

Determining Annual Income:What’s Excluded?• Earnings in excess of $480 for each full-

time student 18 years old or older, except Head, Co-Head or Spouse

• Loans

• Temporary, nonrecurring or sporadic income

• Special “Hostile Fire” pay received by a household member serving in the armed forces

• An extensive listing found in HUD 4350.3 Exhibit 5-1

Determining Annual Income:What’s Excluded?

Good Rule of Thumb: If it is not specifically excluded by HUD, include the income in total household income.

Assets

• Bank Accounts

• Cash on Hand

• Debit Cards

• Revocable Trusts

• Investments

• IRAs & Keoghs

• Retirements Plans

• Lump Sum Receipts

• Deeds of Trust (Homes)

• Life Insurance – Cash Value

• Personal Property (Cars, Jewelry)

• Indian Trust Land

• Term Life Insurance

• Business Assets

• Inaccessible Assets

Included: Excluded:

Qualifying a Household

• Make all of the necessary calculations to determine the household’s annual income

• Carefully compare anticipated income to the applicable income limits

How to Qualify Household• Use a separate Income & Asset

Calculation Worksheet

• Show the steps of your calculations

• Don’t round until the final calculation

• If using calculator tapes, attach them to a blank sheet of paper

• Calculator tapes that obscure info on the verification can cause noncompliance

Tenant Income Certifications• The required documentation certifying

household eligibility for initial occupancy and annually thereafter

• Should only be executed after the verification process is completed

• Do not allow households to sign blank TICs that you fill in later

• Do not allow the household to complete the TIC

Self-Check for Tenant Files• Rental Application

• Proper Verifications

• Income Certification

• Initial Lease

Consistent file order is the best method of determining whether there is missing documentation.

Other Items Reviewed

• A tax credit audit will include a review of the following:Rent RollRCRS data entryUtility Allowance DocumentationSupportive Services Documentation,

if requiredPhysical Condition of the Property

Common Sense Approach

• Simplify!

• Be Consistent!

• Avoid Conflicting Information!

TRICKS of the Trade

• What you always wanted to know, but were afraid to ask!

• The secret tips we don’t tell you!

Excess Documentation Submitted For the Desk Audit

• What we don’t see can’t hurt you

• What we do see might hurt you

Credit Reports

• Look for deferred student loans. Student loans are typically only deferred while you are a full-time student. This is one way to catch discrepancies on student status.

• Look for mortgages. This may reveal assets (land, home, etc) that the household forgot to tell you about.

• Watch for consistency in applying the Tenant Selection Policy

Criminal Reports

• Watch for consistency in applying the Tenant Selection Policy to help avoid Fair Housing complaints

Bank Statements

• Banks frequently charge for verifications; therefore, it is common for you to collect bank statements as verification of assets

• You must include all pages of the statement for the verification to be complete, not just the page showing a single account balance

• Look for deposits that reveal income the family neglected to disclose

Errors in Logic

• Income = $0

• Assets always = $0

• Gross Rent > Income

• Decrease in pay/benefits with no explanation

Common Errors Found in Files• Failure to verify disclosed items• Incomplete verifications• Writing on verification forms• Overtime and bonuses not

included in income• Failure to use highest calculated

income

Common Errors Found in Files• Miscalculated Assets

• White-out used on forms

• Including Social Security #s, bank account #s, etc in file info sent to NCHFA

• Clarification statements that do not provide new information

• Clarification statements should not substantially contradict the verification

Tips for Staying in Compliance

• Adequate documentation is #1 (Unit is not eligible unless you can prove it!)

• Document EVERYTHING

• Self-monitor to ensure compliance

• Have a second set of eyes review each move-in

• Organization is important!!

• Maintain consistent tenant files

• Create a Project Data File

• Attend training

Record Retention

• Files for households that initially qualify the unit as a tax credit unit:Must be retained for 21 years from the

due date of the tax return for the first year of the credit period

• Subsequent years files:Must be retained for 6 years beyond

the due date of the tax return for that year

Project Data File –

Every property should have a binder that contains all of the documents necessary to maintain compliance. Suggested items to include:

Project Data File Tax Credit Application QAPAll Loan DocumentsLURA8609 for each buildingUtility Allowance DocumentationIncome & Rent Limits for each yearRequired annual reports to NCHFAMonthly rent rollsList of vacant units & compliance

with NAU rule

Most Important Key to Success:

Proper Training!

Certifications accepted by NCHFA:

• Housing Credit Certified ProfessionalHCCP Sponsored by National Association of

Home Builderswww.nahb.org

• Credit Certified Compliance ProfessionalC3P Sponsored by Spectrum Enterpriseswww.spectrumseminars.com

Certifications accepted by NCHFA:

• Tax Credit Compliance SystemTaCCS Sponsored by Quadelwww.quadel.com/training.aspx

• National Compliance ProfessionalNCP Sponsored by Housing Credit Collegewww.taxcredit.com

Certifications accepted by NCHFA:• Tax Credit Specialist

TCS or e-TCS Sponsored by National Center for

Housing Managementwww.nchm.org

• Specialist in Housing Credit ManagementSHCMSponsored by National Affordable

Housing Management Association www.nahma.org

Professional training is not enough. You also need to:

• Know the requirements of your state agency

and• Fulfill your obligations as required by

your state

NCHFA Sponsored Training

Agency-sponsored training available across the state

Recommend leasing staff attend at least one training session per year to keep up with changes in rules and procedures

Physical Inspections• NCHFA uses the Uniform Physical

Condition Standards (UPCS) as the inspection standard.

• The goal of the UPCS inspection is to:Measure physical condition of the

propertyObjective and consistent mannerAccommodates all property types &

configurations

Physical Inspections

UPCS inspectable areas:

• Site

• Building Systems

• Exteriors

• Common Areas

• Units

• Health and Safety

Physical Inspections• Levels of Physical Noncompliance

–Level 1-Minor–Level 2- Major–Level 3- Severe

• All UPCS violations are reported to the IRS, regardless of severity per 8823 guide instructions (Tip)


• Example of Levels:Level 1-Minor: 1” to 8 ½” x 11” hole in

sheetrock that does not go through both sides of wall

Level 2-Major: > 8 ½” x 11” hole in sheetrock that does not go through both sides of wall.

Level 3-Severe: Hole in sheetrock that penetrates to the next room OR two or more walls have level 2 damage


Health and Safety Violations

• Exigent (life threatening)Any deficiencies noted under this

category:A list of the deficiencies will be left

with management staffAll exigent deficiencies must be

corrected within 24 hours

• Non-life threateningA list of the deficiencies will be left

with management staff

Physical InspectionsTips for Successful Inspections:

• Notify all residents of the inspection

• Ask residents to raise blinds and remove all items from window sills prior to inspection

• Check smoke detectors and batteries prior to inspection

• Inspect property for violations prior to inspection


Common Noncompliance Issues:

• Blocked egress (Tip)

• Inoperable smoke detectors

• Trip hazards

• Broken or cracked electrical sockets or light switch covers

Types of Noncompliance

• IRS Noncompliance – Issues addressed in the 8823 Guide

published by the IRSExamples:

• Household over-income at move-in• Violation of Next Available Unit Rule• Violation of Student Rules• Lack of proper Utility Allowance

documentation• Physical Inspection Violations

8823 will be issued


• State Noncompliance – Issues important to NCHFA that we

expect the owner to address to remain in good standing with the Agency

Examples:• Failure to maintain the required

number of units at required lower set-asides

• Failure to recertify annually for properties with Agency loans

No 8823


• Program Noncompliance – Violations of program requirements

that are not violations of the tax credit program

Examples:–Violation of Low HOME rent

requirements–Violation of HOME lease

requirements–Violation of Key program

income requirementsNo 8823

Top 5 Reasons for 8823s Issued in 2011

1. Owner failed to submit the Annual Owner’s Certification of Continuing Program Compliance

2. UPCS Violations

3. Owner did not properly calculate Utility Allowance

4. Improper or Inadequate File Documentation resulting in Tenant Over-Income at Move-In

5. Owner failed to respond to Agency request for monitoring review

Questions?

Comments?