How to Keep Track of Form 8823 Compliance Violations

As a tax credit manager, your main goal is to make sure that the owner of your site can claim all the credits allocated to the site. To do this, you must keep your site in compliance with the tax credit law throughout the compliance period. But because the tax credit program’s requirements are so complex, your site may get hit with violations, despite your best management efforts.

If this happens, it’s important that you keep track of all violations and make sure they’re properly corrected. If you ignore violations or don’t correct them properly, they can lead to far more serious problems. Not only might the IRS deny the owner its tax credits, but the owner may hold you accountable for any loss.

To help you keep track of compliance violations and make sure they’re properly corrected, we’ll give you a Model Form: Compliance Violations Tracking Sheet. Using this form will help chart your progress as you correct violations.

How Compliance Violations Are Reported

All tax credit sites must be monitored for compliance, and your state housing agency must report all violations—even minor ones—to the IRS on IRS Form 8823 (“Low Income Housing Credit Agencies Report of Noncompliance or Building Disposition”). Violations may involve health and safety standards, rent ceilings and income limits, and tenant qualifications.

A state agency will perform a desk audit, conduct a site visit, or review the owner’s tenant files and provide the owner with a summary report of its findings. If the report indicates noncompliance, the owner is expected to respond to the state agency within a maximum of 90 days to provide clarification or document that issues of noncompliance have been addressed. Then, the state agency determines whether the owner was always in compliance, has corrected the noncompliance, or remains out of compliance.

Regardless of whether the owner remedied the noncompliance or remains out of compliance, a Form 8823 must be filed with the IRS. And if the state agency reports that the owner is out of compliance, the IRS sends a notification letter to the owner identifying the type of noncompliance reported on Form 8823. The notification letter also states that the owner shouldn’t include any nonqualified low-income housing units when computing the tax credit under IRC Section 42 and that the noncompliance may result in the recapture of previously claimed credits. The notification letter also instructs the owner to contact the state agency to resolve the issue. Once the noncompliance is resolved, the state agency should file a “back in compliance” Form 8823.

The Form 8823 divides the reasons your state housing agency may issue a violation into 16 categories [Form 8823, lines 11(a)-(p)]. For example, it’s a violation if an owner didn’t submit its annual certification [line 11(d)] or didn’t properly calculate utility allowances for its low-income units [line 10(m)]. The Form 8823 also includes a catchall category, to allow for “other noncompliance issues” [Form 8823, line 11(q)].

You should also review the categories listed on line 11 of the form so you know what constitutes a violation. You can review a copy of the form at www.irs.gov/pub/irs-pdf/f8823.pdf or see our “List of Form 8823 Noncompliance Categories,” at the end of this article.

How Tracking Sheet Helps

A good compliance violation tracking sheet helps you keep track of all violations in an organized manner. It keeps the information you need well organized and easy to find. This way, any staff member can learn at a glance how many violations exist, why they’ve been issued, and whether they’ve been fixed. And using a tracking sheet for all your violations means you’ll need to refer to only a single document as you proceed to fix each violation, rather than have to sort through multiple Forms 8823 and their accompanying documentation to find the information you need.

What Information to Include on Tracking Sheet

When you get a Form 8823 from your state housing agency, have a member of your staff enter the information from the form and its accompanying documentation on one row of the tracking sheet. Our tracking sheet has space for your staff to complete information for nine violations in one building.

When a staff member finishes entering the information about a violation onto the tracking sheet, have the staff member file the corresponding Form 8823 (and accompanying documentation) in a folder. Tell staff members to keep all Forms 8823 for a building in one folder. This way, you and your staff can easily find them later.

Our compliance violations tracking sheet is divided into nine columns. Here’s what your staff member should do to complete each:

Unit number(s). Write the unit number(s) the violation affects. You won’t have to enter the building number because each sheet covers only one building [Form, col. 1].

Form 8823 issuance date. Write down the date of the violation. This date appears at the bottom right of the Form 8823 [Form, col. 2].

Violation category. Copy the letter and name of the violation category as it appears under line 10 of the Form 8823. For instance, if your agency checked the box labeled “Out of compliance” on line 10, row d, write: “d. Owner failed to submit annual certification” [Form, col. 3].

Reason for violation. Briefly describe why your state housing agency cited you for noncompliance. Be concise, but don’t leave out any important information. For example, if the violation category is “l. Low-income units occupied by nonqualified full-time students,” give more information about what led to the violation. For instance, write: “One household member didn’t inform us of switch from P/T to F/T student status” [Form, col. 4].

Deadline. Write the deadline your state housing agency gives you to correct the violation. You can find this information in the documentation that accompanies the Form 8823. The tax credit regulations allow state housing agencies to give owners up to 90 days to correct compliance violations.

With state agency approval, the time to correct the noncompliance may be extended up to a total of six months. How much time you’ll get depends on the agency and what’s required to correct the violation. If your agency grants you an extension, write the new deadline [Form, col. 5].

Corrective actions. List what you and other staff members must do to correct the violation. Say your state housing agency cites you for noncompliance because your “gross rent(s) exceed tax credit limits” [Form 8823, line 11(g)]. Write what you must now do to charge the proper rent and correct the violation. For instance, if the reason you overcharged households is that you didn’t use the most recent HUD income limits, write: “Recalculate rents based on most recent HUD income limits; amend leases to reflect lower rent; refund overage to overcharged households” [Form, col. 6].

Date state housing agency notified of corrective actions. After taking steps to correct a violation, you’ll need to tell your state housing agency what you’ve done. Once you’ve contacted the agency, record in this column the name of the person you contacted, the means of communication, and the date. For example, you might write “Letter faxed to Mary Smith, 6/10/13” [Form, col. 7].

Date violation officially corrected. Once you’ve gotten a notice from your state housing agency agreeing that the violation has been corrected, write the notice’s date here. This date is important because it may mark the date when the owner of your site would become entitled to resume claiming credits for units that had been out of compliance [Form, col. 8].

Notes. As you work to correct a violation, jot down any important information you think you’ll need to continue your progress. For instance, if you just scheduled an appointment with a tax credit consultant to help you bring your building back into compliance, indicate when the consultant will arrive, as well as his or her contact information [Form, col. 9].

List of Form 8823 Noncompliance Categories

a)      Household income above income limit upon initial occupancy;

b)      Owner failed to correctly complete or document tenant’s annual income recertification;

c)       Violation(s) of the UPCS or local inspection standards;

d)      Owner failed to provide annual certifications or provided incomplete or inaccurate certifications;

e)      Changes in Eligible Basis or the Applicable Percentage;

f)       Project failed to meet minimum set-aside requirement (20/50, 40/60 test);

g)       Gross rent(s) exceed tax credit limits;

h)      Project not available to the general public;

i)        Violation(s) of the Available Unit Rule under Section 42(g)(2)(D)(ii);

j)        Violation(s) of the Vacant Unit Rule under Reg. 1.42-5(c)(1)(ix);

k)      Owner failed to execute and record extended-use agreement within time prescribed by Section 42(h)(6)(J);

l)        Low-income units occupied by nonqualified full-time students;

m)    Owner did not properly calculate utility allowance;

n)      Owner has failed to respond to agency requests for monitoring reviews;

o)      Low-income units used on a transient basis;

p)      Building is no longer in compliance nor participating in the Section 42 program;

q)      Other noncompliance issues.