During a meeting of the National Council of State Housing Finance Agencies (NCSHA) in June, an IRS official made it clear that violation of Section 42 gross rent limits because of a utility allowance error will result in a loss of credits for an entire tax year. The issue was raised due to some inconsistency between provisions in Chapter 11 of the 8823 Guide dealing with gross rents, and Chapter 18, which deals with utility allowance requirements.
In Chapter 18, the IRS says that state agencies should consider a unit back in compliance and a violation corrected as of the date when an owner reduces the rent and it correctly reflects the utility allowance. This however, does not appear to necessarily represent official IRS thinking. Paul Handleman, IRS branch chief of passthroughs and special industries in the Office of General Counsel, questioned why a rent violation due to a utility allowance error should be treated any differently than any other type of gross rent violation, such as the charging of impermissible fees.
Handleman indicated that the IRS would probably revise the Guide to make clear that the penalty for a gross rent violation due to a utility allowance error is the loss of credit for the year.