Revised 8823 Guide Released
By Elizabeth L. Moreland, NCP-E, SCS, HCCP, SHCM, FHC
From the November 13, 2009 edition of The Compliance Monitor
On September 25, 2009, the IRS released the anxiously awaited Revised 8823 Guide with an October 2009 revision date. The majority of changes included were brought about because of the passage of HERA, the recent changes to the HUD Handbook 4350.3, and the final utility allowance regulations updated in Treas. Reg. 1.42-10, but also included corrections and clarifications to the existing text. As per the IRS, no changes were made to Chapters 3, 7, 13, 19, 20 or 22.
As this Guide is an important component to our compliance success, I have summarized the most important changes.
Chapter 1 – Introduction
In this introductory chapter, the IRS clarifies several items. First, they indicate State Monitoring Agencies must issue an 8823 to the IRS if they become aware of an owner’s disposition of a building. Previously, the Guide only stated an 8823 must be issued if noncompliance was identified. Also, the Guide clarifies that an 8823 must be issued even if an owner remedies a noncompliance issue, not just when an issue remains out of compliance.
An entire section was added describing the authority of the Guide specifically stating that it is not a legal authority rather is provided as a single accumulative reference in regards to whether State Monitoring Agencies should file an 8823 and also is provided to give examples of how the rules apply in specific scenarios. This section also makes three important distinctions about the Guide, specifically: (1) the Guide does not address the tax consequences of noncompliance as that is the taxpayer’s responsibility; (2) the Guide should not be cited as legal authority rather the Code and other formal guidance, which is referenced extensively throughout the Guide, should be referenced; and (3) the Guide or specific parts of the Guide may become obsolete if the underlying authority referenced is revised including, but not limited to revisions made to Section 42 by Congress, additional guidance provided by the IRS after the date of the Guide was revised; and changes made to the HUD Handbook 4350.3.
Chapter 2 – Instructions for Completing Form 8823
In this instructional chapter, the IRS includes special 8823 filing instructions to the State Monitoring Agencies in cases of identified noncompliance on properties that have not yet been issued their 8609s. In these cases, the Guide indicates the State Monitoring Agencies must send the 8823 directly to the IRS Headquarter Analyst rather than the Philadelphia Service Center and that Line 5 of the 8823 indicating the total credit allocated to the BIN should be indicated as zero. As reported to you in the July 31, 2009 (Volume 14, Issue 5) issue of this newsletter, the IRS considers this one of their biggest audit issues and one that will automatically result in an audit trigger. In that issue, I stated that such credits can indeed be claimed but there must be reasonable justification for filing without an issued 8609, and despite the fact the majority of properties falling into this category come out okay, it opens them up to a good deal of IRS scrutiny.
Chapter 4 – Category 11a
This chapter addresses the noncompliance issues surrounding households’ whose income is above the income limit upon initial occupancy and, as was the case in the original Guide, remains quite an extensive chapter. The majority of the changes contained in this chapter were brought about by the passage of HERA and the updates to the HUD Handbook 4350.3. These changes address, but are not limited to, HERA’s income limit provisions and annual recertification exemption, the exclusion of military basic allowance income for certain qualified projects, and the inclusion of student financial aid. Since I have written many articles specifically addressing these changes and how they should be implemented, I will not repeat them here unless they include a different interpretation or include specific implementation guidelines.
One such provision I feel important to address is in regards to the statement addressing children involved in a joint custody arrangement and who are present in the household 50% or more of the time. In cases of a dispute over which household to count such a child in, it appears the Guide is advocating the use of a tax return to settle the dispute specifically stating “determine which parent claimed the children as dependents for purposes of filing a federal income tax return.” From this read, it appears the IRS is stating the household making such a claim should be the household that claims the child as a household member. This appears reasonable, however, may be problematic in the cases where the household does not file a return or in the cases where this dependent election changes from year to year. In these cases, reviewing the custodial papers may be the better documentation to refer to, specifically the provision that indicates which parent is defined as the custodial parent.
The Guide also contains specific implementation provisions regarding increases to household size based on whether the property is mixed-income or 100% Tax Credit. If mixed income, the Guide indicates the addition’s income is added to the household’s most recent TIC, the household continues to qualify and the Available Unit Rule is reviewed to determine if it is now invoked. If the project is 100% Tax Credit, then the addition’s income is added to the existing household’s original TIC.
It is also important to note that the Guide includes the HUD Handbook’s Change 3 provisions owners and managers should consider when dealing with households which have a household member called to active duty in the Armed Forces. When Change 3 was published, I contacted the IRS to determine how they would interpret these leniencies for affected Tax Credit households and was told at that time they were contemplating their decision. With the inclusion of these provisions in the Revised Guide, it appears they have made their decision as the following was included in Chapter 4, page 4-11:
“Owners are encouraged to accommodate the unique circumstances of households where a member is called to active duty in the Armed Forces. Specific actions that owner can take and remain in compliance include, but are not limited to:(1) Allow a guardian to move into the low-income unit on a temporary basis to provide care for any dependents the military person leaves in the unit. The guardian’s income is not included in the household’s income; (2) Allow a tenant living in a low-income unit to provide care for any dependents of persons called to active duty in the Armed Forces on a temporary basis as long as the head and/or co-head of the household continues to service in active duty. Income of the dependent (e.g., SSI benefits, military benefits) is not included in the household’s income; and (3) Allow leases to remain in effect for a reasonable period of time without recertification (if required) depending on the length of deployment beyond that required by the Soldiers’ and Sailors’ Civil Relief Act of 1940, U.S.C. §§501-591, even though the adult members of the military family are temporarily absent from the assisted unit.”
For those of you possibly affected by these new leniencies, I suggest you contact your State Monitoring Agency before implementing any of them to be sure they are aware of these provisions and their inclusion in the IRS’s Revised 8823 Guide and, more importantly, to ensure they too will be allowing such leniencies.
This chapter also specifically addresses self-employment and indicates two important provisions. First it states all self-employed individuals operating a sole-proprietorship must file a tax return regardless of reporting a profit or a loss and whether or not they are eligible to obtain a social security number. This is a new interpretation that will have a big impact on those housing self-employed individuals. In the past, alternative methods for determining self-employment income, such as obtaining an estimated Profit and Loss Statement, were assumed acceptable. However, it appears the IRS holds a different opinion and is saying it is a requirement that such a return be filed. And second it addresses home-based businesses specifically stating a tenant may indeed use a portion of her unit for a home-based business and may even claim the associated expenses as a business deduction on her tax return as long as the unit is the tenant’s primary residence. It also states that if the household is operating a daycare within the unit, “the tenant must have applied for (and not have been rejected), be granted (and still have in effect), or be exempt from having a license, certification, registration, or approval as a daycare facility or home under state law.” The Guide then cites Form 8829, Expenses for Business Use of Your Home and Publication 587, Business Use of Your Home (Including Use by Daycare Providers) as its reference. It appears it is now a requirement that if a tenant wants (and the owner/manager allows) a daycare in a Tax Credit unit, it must follow the licensure procedure. In the past, it was assumed this requirement was at the owner’s or manager’s discretion.
Another important provision contained in this Chapter is in regards to the treatment of student financial aide. As previously reported, the IRS has indeed taken a literal read of the HUD Handbook in regards to this type of income stating that if the household does not receive Section 8 assistance, the financial aide is excluded no matter how used and if the household is receiving Section 8 assistance the financial aide in excess of tuition is included unless the recipient is over 23 and has dependent children or the recipient is living with her parents who are applying for or receiving Section 8 assistance.
The IRS also included an important footnote regarding annual recertification effective dates specifically stating that if a tenant is subject to other recertification requirements that have different effective date definitions, the recertification will be useable for Tax Credit purposes as well. This footnote simplifies the recertification process on Tax Credit properties coupled with other programs such as RD Section 515 and HUD Section 8.
As with the original Guide, this chapter also addresses unit transfers. As in the original Guide, the IRS continues to interpret different building transfers as swaps rather than as a move-out/move-in citing Revenue Ruling 2004-82, Question and Answer # 8 as its reference for this interpretation even though this citation specifically addresses different building transfers that involve a unit that has never been occupied by a qualified household. Despite the disconnect with the reference cited, the Revised Guide continues to state all different building transfers are swaps and only households invoking the Available Unit Rule are ineligible for such transfers.
In the acquisition/rehab portion of this chapter, the IRS added a footnote in regards to certification dates of existing tenants specifically providing an alternative to owners and managers that have access to the property and the tenants prior to the actual closing date. This alternative allows the existing tenants to be certified prior to the acquisition date using the current income limits and the acquisition date as the effective date. This footnote does not, however, indicate how far in advance such a certification can take place.
A new section was added to this chapter specifically addressing how to handle previously qualified Tax Credit households that live in a property that receives an additional credit allocation or that were sold to a different owner who subsequently receives acquisition/rehab credits. The IRS states that if an existing household initially qualified upon move in and remains in compliance throughout their occupancy, the household will continue to qualify for the new allocation. If the household has invoked the Available Unit Rule under the initial allocation, the household remains eligible but the owner becomes subject to the Available Unit Rule under the new allocation as well. And finally, if the unit is vacant at the time of the new allocation, it retains the status of the last household it occupied which means it is a vacant Tax Credit unit if last occupied by a qualified household. The owner, however, is subject to the Unit Vacancy Rule. Vacant units, however, are treated differently for existing Tax Credit properties sold to a new owner who receives acquisition/rehab credits. In these cases, the vacant units are not considered Tax Credit units until filled with a qualified household.
The IRS also included a technical correction in this chapter, specifically, changing the treatment of Unit 8 in Example 1 under the Income Qualifying Households During The First Year of the 10-Year Credit Period section which discusses how the first year applicable fraction is calculated on a property undergoing a rehab. Originally in this example, the IRS had treated this unit as a vacant Tax Credit unit even though in the example the qualified household that originally occupied it transferred to a non-labeled or market rate unit in the same building. However since same building transfers are swaps, Unit #8 should have been classified as a market rate unit after the transfer occurred. This was corrected in the Revised Guide and the IRS has stated it will not challenge any taxpayer that relied upon the original Guide.
Chapter 5 – Category 11b
This chapter addresses noncompliance issues surrounding annual recertifications. The majority of the changes made to this chapter address the annual recertification exemption provision contained in HERA, but it should be noted that the IRS also included a new section providing audit relief on properties financed by RD 515 and Tax-Exempt Bonds. In this section, the IRS indicates State Monitoring Agencies may review the documentation submitted by either RHS or the bond issuer in lieu of performing a separate income certification audit of their own if the agency enters into an agreement with these entities.
Chapter 6 – Category 11c
This chapter addresses noncompliance issues surrounding physical inspections. The majority of changes made to this chapter were clerical in nature; however, the IRS did add a section addressing vacant units. In this section, the IRS clearly indicates all vacant units must be prepared for occupancy within a reasonable amount of time from the date of vacancy even if multiple units are vacant and there are a sufficient number of units prepped for occupancy.
Chapter 8 and 9 – Category 11e
These two chapters address noncompliance issues surrounding eligible basis and the applicable credit percentage. Changes made to these chapters address HERA’s eligible basis and applicable credit percentage provisions including the change in the treatment of federally-funded grants, the increases to basis with buildings containing a community service facility, and the 9% applicable credit percentage for non-federally subsidized buildings placed in service after July 30, 2008 and before December 31, 2013. Once again, since I have written many articles specifically addressing these changes and how they should be implemented, I will not repeat them here.
Chapter 10 – Category 11f
This chapter addresses noncompliance issues surrounding the minimum set-aside requirement and again addresses the changes brought about with the passage of HERA that affect minimum set-aside.
Chapter 11 – Category 11g
This chapter addresses noncompliance issues surrounding gross rents. Besides addressing the changes brought about by HERA, this chapter includes a new section indicating State Monitoring Agencies must determine owners are in compliance with the Maximum Allowable Rents both on a monthly basis and a yearly basis. According to this new section, State Monitoring Agencies are to ensure the gross rents (rents plus utility allowances and applicable fees) are at or below the monthly Maximum Allowable Rent as they normally do but now they must also be sure owners did not collect more than the maximum allowed in a given year.
Also, in this Chapter, the IRS has included the following statement in the Back in Compliance section: “Once a unit is determined to be out of compliance with the rent limits, the unit ceases to be a low-income unit for the remainder of the owner’s tax year. A unit is back in compliance on the first day of the owner’s next tax year if the rent charged on a monthly basis does not exceed the limit.” This is a dramatic change from the original Guide which stated: “A unit is back in compliance when the rent charged does not exceed the limit.” No reference was included with this statement indicating how the IRS has made such a dramatic shift in interpretations.
Chapter 12 – Category 11h
This chapter addresses noncompliance issues surrounding general public use and specifically addresses the clarifications made to the general public use requirement included with HERA. The IRS also introduced a new section in this chapter regarding marketing vacant units specifically stating owners should advertise the availability of a vacant unit using advertising methods designed to be accessible to all prospective tenants. This section also addresses how the IRS defines reasonable attempts specifically citing Revenue Ruling 2004-82, Question and Answer #9. As with this ruling, the IRS continues to state reasonable attempts are specific to the property, its location and size, market conditions, turnover rates, and available advertising media and the costs associated with this media.
Chapter 14 – Category 11i
This chapter addresses noncompliance issues surrounding the Available Unit Rule. The majority of changes made to this chapter address the fact that annual recertifications are no longer required on 100% Tax Credit projects. When applying this rule to 100% projects, the IRS states that all households will continue to be treated as qualified households as long as they were documented as initially qualified when they moved in and the owner demonstrates due diligence when completing the initial qualification process. The IRS indicates failure to demonstrate due diligence occurs when the State Monitoring Agencies find numerous mistakes when auditing a property’s initial certifications or when owners allow households to move in prior to their paperwork being completed. If such occurs, the Available Unit Rule will be considered violated at the earliest unacceptable initial income certification.
The IRS also provides an alternative means for determining when a unit is comparable or smaller. In the original Guide, the IRS states comparability should be measured using the same method the applicable fraction was determined for the credit year in which the comparable unit becomes available. In the revised Guide, the IRS indicates that an owner may need to identify whether a unit is comparable before the end of the year when qualified basis and its corresponding applicable fraction are determined. In these cases, the IRS states an owner may look at number of bedrooms and the comparability of amenities. So a unit with the same number of bedrooms or fewer and with the same amenities would be the alternative measuring standard. Quite frankly, this does not make sense to me as when dealing with changes to the applicable fraction, one must look to the changes in number of Tax Credit units or the change in overall Tax Credit square footage. The number of bedrooms simply does not have any impact and therefore does not seem to be a good measuring stick especially on properties where unit types with the same number of bedrooms have varying square footages. By following this advice, owners could end up converting a larger unit with the same number of bedrooms and detrimentally impact the properties rent revenues and operating budget. Also, if an owner relies upon this alternative advice, they must still be aware of the resulting applicable fraction and not “turn off” the rule unless the original fraction is re-obtained not counting the invoking unit. In other words, if an invoking unit is 1000 SF 2-bedroom unit and a vacant 900 SF 2-bedroom market unit comes available, and is rented to a qualified household, the rule must still remain “turned on” and the invoking household could not be converted to market rate as there was not enough square footage converted to Tax Credit to keep the fraction at its original level.
Chapter 15 – Category 11j
This chapter addresses noncompliance issues surrounding the Unit Vacancy Rule. The changes to this chapter are minor. This chapter too includes the alternative definition for comparability discussed above as like the Available Unit Rule, the Unit Vacancy Rule also has a comparable or smaller size component to it. It should also be noted that the IRS clarifies violations occurring when vacant units are not immediately prepped for occupancy and when owners fail to market low income units are General Public Use violations rather than Unit Vacancy Rule violations.
Chapter 16 – Category 11k
This chapter addresses noncompliance issues surrounding the recording of an Extended Use Agreements. In this chapter, the IRS clarifies the one-year remedy period when an owner is notified he does not have an executed Extended Use Agreement in place. State Monitoring Agencies should make this notification in writing and document the owner’s receipt of the notification. The one-year remedy period begins when the owner is notified. Also, the State Monitoring Agency should attach a copy of the letter to the 8823 before submitting it to the IRS.
Chapter 17 – Category 11l
This chapter addresses noncompliance issues surrounding the full-time student rule. The changes addressed in this chapter address the numerous changes made to the full-time student rule since the original publication of the 8823 Guide. This includes, but is not limited to the foster children exemption, the change to the single parent exemption allowing the absent parent to claim the children as dependents, and HERA’s alignment of the Bond and Tax Credit Program’s student rules. The IRS also clarifies that this rule can be violated if the owner fails to certify student status at move-in or if the annual student status verification was performed late and after notification of a State Monitoring Agency review.
Chapter 18 – Category 11m
This chapter addresses noncompliance issues surrounding utility allowances. The changes contained in this chapter are those brought about with the final utility allowance regulations and Notice 2009-44 which clarifies submetering as a means of a tenant paying their utilities directly and not through an owner. Once again, since I have written many articles specifically addressing these changes and how they should be implemented, I will not repeat them here.
Chapter 21 – Category 11p
This chapter addresses noncompliance issues surrounding the owners no longer participating. This chapter contains only minor changes affecting typos or minor omissions from the original Guide.
Chapter 23 – Category 11q
This chapter addresses other noncompliance issues not associated with any other category. In this chapter, the IRS again addresses the annual recertification exemption on 100% Tax Credit properties and clarifies that State Monitoring Agencies are allowed to impose more restrictive criteria such as one anniversary recertification. However, even though these additional restrictions can be imposed at the agency’s discretion, noncompliance related to these imposed restrictions are not reportable to the IRS.
Chapter 24 and Exhibit 24-1 – Building Disposition
This chapter and exhibit address noncompliance issues surrounding owners no longer participating and includes the HERA provision regarding surety bonds. Specifically that surety bonds are no longer required on dispositions after July 30, 2008.
Chapter 25 – Miscellaneous Noncompliance Topics
This chapter addresses noncompliance not discussed elsewhere in the Guide including tenant or owner misrepresentation and fraud. In the original Guide, the IRS wanted tenant fraud to be reported to its Tax Fraud Hotline number. In the revised Guide, this is changed to the IRS’s Whistleblower Office and indicates Form 211, Applicable for Award for Original Information, should be used to report the fraud.
Chapter 26 – Tenant Good Cause Eviction and Rent Increase Protection
This chapter addresses the protections given to tenants in regards to evictions and rent increases. In this chapter, the IRS defines eviction and tenant termination. They also state that such terminations must be for good cause but states good cause is not defined by them rather it is determined by local landlord/tenant laws. This chapter also addresses lease non-renewals stating they must be for good cause and the tenants must be notified the lease will not be renewed as per local landlord/tenant law.
So there you have it… a thorough and comprehensive look at the Revised 8823 Guide! To download your own copy of the Revised Guide, please Click here: Revised_8823_Guide_10.09.pdf.