IRS Releases Updated 8823 Guide

Minor changes may indicate more significant updates to come.

The IRS recently issued updated guidance for completing Form 8823, the form used by state and local LIHTC agencies to notify the IRS in the event of noncompliance or building disposition. The Guide for Completing Form 8823 was first published in 2007 and, at the time, it was a long-awaited companion piece to IRS Form 8823, as LIHTC program participants were urgently seeking IRS interpretation of the Section 42 regulations to better manage their sites.

In the opening chapter, the IRS is clear that the guide is written for housing credit agencies when preparing Form 8823; however, it also provides clarification for the industry with regard to its federally recognized noncompliance topics. Since publication, the guide was revised in 2009 and 2011. And last year, the IRS announced that an updated guide had been drafted and submitted for review.

While the guide is not a legal authority, many in LIHTC industry look to it for guidance and examples when evaluating the compliance of LIHTC units, buildings, and projects. But since it was last updated in 2011, many of the rules have changed, making sections of the guide obsolete. The likelihood of this happening was addressed in the guide where the IRS says the guide, or chapters of the guide, may become obsolete if the underlying authority is revised subsequent to the guide’s revision date. For example, if IRC Section 42 is revised by Congress, the IRS provides formal guidance, or if HUD revises the definition or treatment of income as explained in HUD Handbook 4350.3, parts of the guide would become obsolete. And the guide or chapter would be obsolete as of the effective date of the revised legal authority.

With the recently published 8823 guide, we’ll go over what’s changed and what has not yet been included in this revision.

IRS Form 8823 Basics

As a tax credit owner or manager, IRS Form 8823 is a document you should familiarize yourself with to help you manage your tax credit site. It can be found at www.irs.gov/pub/irs-access/f8823_accessible.pdf.

Your state housing agency uses this form to report all compliance violations, even minor ones, to the IRS. So it’s a good idea to familiarize yourself with this form, even if you haven’t gotten any violations. These forms are filed on a per-building basis, determined by the Building Identification Numbers (BINs), and include provisions for other relevant building information along with a list of noncompliance issues identified by the IRS. These issues are covered in line 11 of the form and include examples such as renting a low-income unit to a household that doesn’t qualify for one [line 11(a)], or if you rent to nonqualified full-time students [line 11(l)]. Form 8823 also includes a catchall category to allow for “other noncompliance issues” [line 11(q)].

Upon finishing their compliance monitoring reviews, state housing agencies complete the form by checking the applicable boxes by line item, indicating whether the building was found out of compliance and if the noncompliance has been corrected in the meantime. Owners are given a correction period of up to 90 days once noncompliance has been found before the credit agency notifies the IRS. The 8823s are then submitted to the IRS for its records, and it’s at the IRS’s discretion as to whether there will be follow-up to the findings, which could potentially result in the loss of tax credits to the site’s investors.

Minor Changes Made to Guide

Generally, the Form 8823 guide’s chapters follow the same order of the noncompliance issues listed in items 11a to 11q of the Form 8823 and provide examples of what the IRS considers to be in compliance with each provision, out of compliance, and back in compliance. This new guide makes minor changes to the existing 2011 edition. And the fact that the IRS didn’t make substantive changes—such as including Change 4 of HUD Handbook 4350.3, NSPIRE standards, and the average income test—is surprising considering the IRS asked for feedback last year on its plans to revise the 8823 guide. It may be the case that the IRS will issue another update the 8823 guide soon.

Beyond the new format to match other IRS publications, here are the minor changes in the new 8823 guide that we have identified.

Income exclusions. The recent guidance made changes to the section on “Items Excluded from Income (Miscellaneous).” It removed from the 2011 list three items. These involved payments from the Agent Orange Settlement Fund; any earned income tax credit to the extent it exceeds the tenant’s income tax liability that’s not included in income; and the value of any childcare provided for under the Child Care and Development Block Grant Act.

It’s important to note, however, that these items are still on the list of federally mandated income exclusions. And because Section 8 income rules are used in the determination of income for the LIHTC program, the published federal income exclusions also apply to the LIHTC program.

Sample 8823 form. Another change made to the 2011 guide is the inclusion of the current version of Form 8823 and its instructions as Exhibit 1-2. The current version of the form and its instructions were revised in June 2023. For this version, the IRS added the average income test to the noncompliance category of a project failing to meet the minimum set-aside requirement [line 11(f)].

The instructions in Exhibit 1-2 explain that in 2018, Congress revised LIHTC program rules to add a third minimum set-aside option, the average income test. The rules now allow sites to take LIHTCs on units that have designated an imputed income limitation that allows tenants with incomes at 70 percent or even 80 percent of area median income (AMI) as long as there are additional units with designated imputed income limitations at 30 percent, 40 percent, 50 percent, or 60 percent of AMI, so that the overall average for all units doesn’t exceed 60 percent of AMI.

It’s interesting to note that the only mention of the average income test minimum set-aside in the most recent guide is in Exhibit 1-2. The chapter on Category 11(f) defining the requirements and giving examples of being in compliance and out of compliance make no mention of the average income test. This absence makes it seem more likely that the IRS will issue a new guide with updated information.

Noncompliance notification letter. The recent guide also includes the current version of the IRS Noncompliance Notification Letter, Letter 3464 (SC/CG), which the IRS sends to owners to inform them of noncompliance. It’s included as Exhibit 1-3. This updated letter, compared to the notification letter from the 2011 guide, has more information on claiming tax credits when there’s uncorrected noncompliance and if the site fails the minimum set-aside test.

The letter states that if a site is subject to recapture under IRC Section 42(j) because of uncorrected compliance, the site cannot claim the credit for the year in which the recapture occurs. Also, the accelerated parts of the credits a site has already claimed may be subject to recapture. And if the building fails the minimum set-aside test in the first year of the compliance period, the owner may not claim any credit for the building. If the building fails the set-aside test in any other year during the compliance period, the owner may not claim the credit for that year, and the accelerated part of the credits are subject to recapture as well.

Future Updates

The closest equivalent publication to HUD Handbook 4350.3 for the LIHTC program is the IRS Guide for Completing Form 8823. Unfortunately, due to the minor changes made in the recent update, there are still changes that have occurred since the guide was last published in 2011 that are not addressed in the current guide.

HUD Handbook 4350.3, Change 4. In 2013, Change 4 to HUD Handbook 4350.3 was published. Chapter 5 of this Handbook is applicable to LIHTC sites—we use the information in this chapter to determine assets and income for applicant households and those we are recertifying. Change 4 clarified the idea that IRA, Keogh, and other retirement savings accounts are considered to be assets even though a withdrawal would result in a penalty unless periodic payments are being received from them. 

Physical inspection regulations. Treasury Regulation Section 1.42-5 describes the minimum compliance monitoring requirements for each state housing finance agency. The first inspection must be completed no later than the second calendar year after the last building in the low-income project is placed in service. After the first inspection, the agency must conduct inspections, at least, once every three years throughout the extended use period.

In February 2019, the Treasury Department released a new regulation that requires housing agencies to inspect at least as many units as specified by project size in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart [§1.42-5(c)(2)(iii)]. Agencies also must conduct on-site inspections in units in all buildings in a project, rather than simply applying the minimum unit sample size on a project-wide basis if a project encompasses multiple buildings. The regulations also shortened the reasonable notice requirement to 15 days in advance of when a site will experience a physical inspection or review of low-income certification, down from a 30-day notice requirement.

Average income test. The average income test was established as the third minimum set-aside option for LIHTC sites when the Consolidated Appropriations Act of 2018 amended Internal Revenue Code (IRC) Section 42(g). Although the recent guide mentions the minimum set-aside option in the sample form, you can expect a future update that delves deeper into the topic.

HOTMA provisions. In 2016, the Housing Opportunity Though Modernization Act (HOTMA) was signed into law. It made numerous amendments to Sections 3, 8, and 16 of the United States Housing Act of 1937, including significant changes to income calculation, net family assets, and income reviews. Its effect on HUD’s Section 8 program is important for the LIHTC program because, according to Treasury Regulations Section 1.42-5(b)(1)(vii), “Tenant income is calculated in a manner consistent with the determination of annual income under Section 8 of the U.S. Housing Act of 1937.” HOTMA became effective Jan. 1 of this year, and HUD has issued a full compliance deadline of Jan. 1, 2025, for multifamily owners.