Beware of Four Potential 'Red Flags' When Verifying Income

Underdocumenting income is one of the most common errors site managers can make when certifying or recertifying households, according to Barbara Crook, compliance director for Affordable Housing Support Services, an affordable housing compliance consulting firm in Littleton, Colo.

There are four prevalent problem areas for which sites often fail to provide complete or accurate information. Not having the proper verification and documentation raises a red flag to auditors, which could result in tax credit noncompliance. We'll look at the key challenges each area poses, and give you tips for ensuring that households have been properly certified and that documents are complete.

Households that Claim No Income

Sometimes households will claim zero income during the initial eligibility review or annual recertification. It's important to verify the claim by having the household member complete an affidavit that clearly identifies common sources of income. This will help to ensure that households understand what counts as income and will prevent mistakes that lead you to rent a low-income unit to a household that is over the limit.

“But,” adds Crook, “the question for site staff is how will the household pay the rent if they're not receiving any rental assistance?”

An important point to keep in mind—and to document—is the household's anticipation of income. “They may be currently unemployed, but have a history of earning income,” she points out.

Your affidavit should include the following:

• A statement that requires households to swear that they do not expect a change in financial or employment status over the upcoming 12 months;

• An explanation of how they plan to meet their financial obligations (including food, medical, and other living expenses); and

• Acknowledgement of the consequences of providing false information, should you need to evict or transfer the household at a later date.

EDITOR"S NOTE: We provide a Model Zero-Income Affidavit, which you can download from our Web site (http://www.taxcredithousinginsider.com). However, be sure to check with your state housing agency for its no-income certification requirements before using our form.

Self-Employed Households that Cannot Provide Tax Returns

Verifying the income of a household member who is self-employed can be challenging if the individual does not file tax returns and has no written history of income. Crook recalls an example of a resident who reported an anticipated income of about $20,000 that she expected to make through massage services, but she had never filed a tax return and had no written history of income. Since she was being paid in cash, her ability to document her self-employment was going to be very difficult, she adds.

“If you can't verify income through tax returns, then you need another way to verify anticipated income,” Crook says.

The best way to do that is through a third-party verification from an employer, accountant, attorney, or social services organization.

EDITOR"S NOTE: Take steps to deter fraud by requiring household members who earn income through self-employment to submit a signed and notarized self-employment income affidavit. You can obtain a form from your state housing agency, or you use our Self-Employment Income Affidavit Model Tool, which can be found on our Web site (http://www.taxcredithousinginsider.com).

Incomplete Third-Party Verification Forms

In the event that you need to complete a third-party verification of income for all employed household members, it's important to check that all questions on the form are fully answered. Employers often leave blanks, which can be a warning signal for auditors.

If questions are left unanswered, then you will need to include a clarification form to verify the pertinent information. A telephone verification filled out by site staff should include the name of the person contacted, date of the call, the item that is being verified, information requested of the contact, and the staff member's details (name, title, date, and contact information).

A word of caution: Telephone clarification should be used as a follow up of written verifications. Using oral authentication as your sole means of verification may result in moving in an income ineligible household and putting the owner's tax credits at risk.

Asset Certifications

If the cash value of a household's total assets exceeds $5,000, you must verify the value of all items reported as assets [Handbook 4350.3, par. 5-12(A)(1)]. Appendix 3 of the Handbook outlines the acceptable verification methods to use for each type of asset.

However, households with assets of $5,000 or less at a tax credit site may self-certify by submitting a signed, notarized affidavit. Be sure to check with your housing finance agency (HFA), since most require specific asset certification forms to be used.

The exception to self-certification occurs when a tax credit site also receives Section 8 subsidies or funds through the HOME program. In those cases, “every asset must be third-party verified,” Crook says, “even if it's a $5 checking account.”

Crook adds that having a well-designed income and asset questionnaire is critical for effective verification. “It's the single piece of documentation that will tell you what the household views as its sources of income and assets. The questionnaire should include questions about having sold or given away assets for less than fair market value, which is mandatory. You can ask that question on the income questionnaire, as well as on the asset certification. There will be some redundancy, but it's usually better to be a little redundant than to miss the question altogether and then be issued an audit finding.”

PRACTICAL POINTER: Put a system in place in which certification and recertification files are always reviewed and approved by a second individual. “Property management offices are busy environments—phones are ringing, people are coming in with work orders, and you're trying to lease units. It's nonstop at some sites,” says Crook. “Being able to focus on tax credit compliance can be very difficult. A second set of eyes reviewing every application and recertification can help you to avoid the small errors, and hopefully catch some of the larger ones.”

Insider Source

Barbara Crook: Affordable Housing Support Services; (303) 798-6234; barbaracrook@ahsscolorado.com.

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