Verification of income from employment is usually just a matter of obtaining a written verification of income from the employer or the most recent four to six consecutive pay stubs from the applicant. However, in some cases, persons are paid in cash and do not receive paychecks or directly deposited employment income. In these cases, verification of income can be problematical. When verifying income for Section 8 or other HUD projects, HUD requires obtaining third party written verification, and if such verification is not possible, oral third party verification may be obtained. If not third party verification is possible, in some circumstances an affidavit provided by the applicant may be acceptable, but this is certainly a last resort – even for HUD properties where mistakes in certifications can be corrected by an interim certification. Certifications for Low-Income Housing Tax Credit Projects (LIHTC) are a different issue, since there generally is no “do-over.” Tax credit managers have to get it right the first time and an incorrect certification (or one that the Housing Finance Agency [HFA] will not accept) can lead to a credit reduction for a property.
Some states (California for example) have very strict income verification requirements that exceed the requirements outlined by HUD in Handbook 4350.3, Chg. 4. HFAs are permitted to impose requirements that are stricter than HUD and LIHTC owners and managers in those states need to understand what those requirements are. We review LIHTC properties in all the states and territories and I teach students from all over the country how to comply with the requirements of the LIHTC program. One of the most common questions I get when teaching and one of the most common issues my staff confronts during file reviews is how to handle the verification of income for someone who is paid in cash. Following are the procedures we recommend in these cases, but keep in mind – if the requirements of your HFA are more stringent than our recommendation, you should follow your state’s guidance.
If your applicant/resident states that they are paid in cash for their employment, we recommend the following information be obtained:
- A statement from the employer on company letterhead or management form regarding the amount paid to the employee in cash and how the money is paid (i.e., weekly, bi-weekly, semi-monthly, monthly, etc.).
- Obtain the most recent tax return of the applicant/resident either by having the resident obtain a copy of the transcript from the IRS by calling 1-800-908-9946 or obtaining the return directly from the IRS by having the applicant sign an IRS Form 4506-T and submitting the form to the IRS.
If the applicant/tenant states that they do not file taxes, the return should still be requested from the IRS. The IRS will confirm that no return is on file. The IRS has determined that in many cases, individuals who are paid in cash are “independent contractors” and are required to file tax returns.
Managers should keep in mind that in order to obtain the tax return using one of the methods shown above, a person must have either a Social Security Number or a taxpayer identification number (TIN). I recommend that if a tenant is paid in cash and does not have a SS number or TIN, I recommend that they be required to apply for one prior to considering their application.
In essence, we strongly advise against renting to applicants solely on the basis of a self-certification of employment income (or most other forms of income for that matter). Residency in LIHTC properties is a privilege – not a right, and the burden to demonstrate eligibility rests with the applicant; management’s burden is to request the required information.