The IRS has released the third version of the 8823 Guide, designed to assist State Agencies and taxpayers in understanding IRS requirements relative to compliance with the Section 42 Low-Income Housing Tax Credit Program.
Changes were not as sweeping as the 2009 version (the Guide was originally published in 2007), but the clarifications that were made are important, especially with regard to utility allowances. Following is a summary of major revisions or additions:
• The Guide makes it clear that noncompliance corrected within three years of the end of the initial correction period must submitted by HFAs to the IRS to place the building back in compliance. This is an important clarification, in that it places States on notice that corrections made within the three-year timeframe place a property back in compliance, and the States must report this action to the IRS;
• Clarifies that for tax years ending after July 30, 2008, if all low-income buildings in a project are 100 percent low-income buildings, owners are not required to complete annual tenant income certifications. There was some confusion in the past as to whether or not 100 percent low-income buildings in a mixed-income project could avoid the annual recertification, but this makes it clear that in order to avoid the recertification requirement, each building in a project must be fully low-income;
• The most significant changes are contained in Chapter 18, Utility Allowances. In the “Out of Compliance” discussion of this chapter, the Guide states that units are out of compliance when “gross rent exceeds the maximum gross rent limit.” The examples of noncompliance provided show that a mistake in the calculation of an allowance is noncompliance only if when corrected, the calculation shows that excess rent was collected as a result of not correctly updating or calculating the allowance. Use of an inappropriate utility allowance (e.g., using a local utility company estimate for a HUD regulated building) is also noncompliance. The Guide also directs HFAs to review the most current utility allowance – even if it is dated more than a calendar year after the prior allowance. In this case, the owner discovered and corrected the error; therefore, no noncompliance should be reported. Noncompliance for a rent overcharge due to an error in the utility allowance is corrected in the month the rents are lowered to the correct amount.
This is very important guidance, since it indicates that only excess rent charged due to systemic errors (wrong income limits, etc.) cannot be corrected until the January after the year of the violation.
o Failing to conduct an annual utility allowance review may be corrected in one of three ways:
Retroactive annual review, documenting compliance with the appropriate allowance on the date it should have been updated. In this case, as long as the correct allowance would not have resulted in a rent overcharge, no 8823 is issued;
New review using current circumstances. If the new allowance shows that the owner has not charged excess rent as a result of the updated allowance, the owner is in compliance and no 8823 is issued; or
If the method used in the first two options shown above shows that the allowance should have been increased, and the increased allowance would have created a rent overcharge, the back in compliance date is the date the rents are reduced to reflect the new utility allowance. If the rent paid, plus the new allowance would not have resulted in rent in excess of the maximum permitted, the owner is in compliance and no 8823 is issued.
o If an owner cannot provide documentation of the allowance calculation that satisfies the State, the owner may repeat the annual review using the same method and facts as used for the original review. If the results show the owner to be in compliance, no 8823 should be issued.
o Utility allowance noncompliance is reported whenever the rent paid by the tenant plus the correct utility allowance exceeds the maximum gross rent limit.
o Noncompliance for a utility allowance should not be reported if, regardless of the error, excess rent was not charged, or the owner corrected the noncompliance prior to the HFA notification of review.
All owners should carefully review the revised Guide for applicability to their specific circumstances, but as has been the case with prior editions, many of the charges are beneficial to managers and owners of LIHTC properties.