Low-Income Housing Tax Credit Audits Are Increasing
By Caitlin Jones
3 min read
Tax Credit Advisor, August 2010: Internal Revenue Service agents are conducting a greater volume of audits of tax returns for low-income housing tax credit (LIHTC) issues. In a change in pattern, most of these audits are being generated by IRS revenue agents in the field rather than initiated by IRS headquarters as the result of IRS Forms 8823, according to IRS senior analyst Grace Robertson.
In the past, most LIHTC audits were initiated by IRS headquarters as the result of a filed 8823. State housing credit agencies file Form 8823 to report the discovery or correction of non-compliance with LIHTC program requirements in a housing credit project.
“There is a growing volume and a significant volume of work that’s being selected by other [IRS] people for other reasons, and the Section 42 credit is surfacing as an issue,” Robertson said in an interview. “Those may be audits of partnerships that own the properties; they may be the investor returns, syndicator returns, developer returns. Some of the [syndication] funds are being audited as well.”
She said the LIHTC issues being examined in audits are the “same as always.” Among these are: whether a taxpayer is claiming more credit than they should; the taxpayer’s eligible basis; and, for investors, whether they have claimed the same amount of credit indicated on their K-1, have basis to claim the credit, or have sold their interest.
Robertson didn’t know why the share of LIHTC audits generated by field agents has increased.
Other Comments
Robertson also reported that there have been an increasing number of audits based on 8823s flagging non-compliance in individual properties with LIHTC physical condition requirements. Some audits have resulted in adjustments to the credit.
One example of non-compliance that has been found, she said, is not bothering to clean vacant units in some properties with high vacancy rates. There have been safety issues as well. Under the program, units must be physically suitable for occupancy in order to qualify for housing credit.
Robertson said physical condition non-compliance is one of the top three current causes of audits based on 8823s. The other two are taxpayers not reporting dispositions or failing to recapture credits upon disposition, and non-compliance involving first-year certifications and Form 8609.
In another area, Robertson is partway through drafting a new version of an IRS audit technique guide for the LIHTC program. She noted it will be drastically different from the previous, discontinued guide, and will walk revenue agents through the steps of conducting an audit pertaining to LIHTC issues. “The focus is going to be more on the eligible basis issues and how to audit those issues,” Robertson said at a Chicago conference on June 25. She said she has outlined 18 chapters and is working now on No. 8.
Robertson’s complete initial draft is to be submitted by year-end for internal IRS review. After review and modifications, it will be made available for public comment, and then revised as needed and released in final form.
