IRS Releases Updated LIHTC Audit Technique Guide

The IRS recently released its new audit technique guide (ATG) for IRC Section 42, Low-Income Housing Credit. The purpose of the ATG is to help IRS examiners audit owners of LIHTC projects. It’s organized in the order an examiner might address issues during an examination, starting with an overview of the credit and how to complete a precontact analysis through calculating an adjustment to the credit and writing the audit report. Two related topics, auditing partners and completing the Examination of Income, are also addressed.

The ATG was last updated in 1999. And this new version incorporates feedback on a draft that was released for public comment last December. Nineteen groups and individuals responded to the public call for comments, and the comments covered a wide range of issues and included technical corrections and suggestions for additional topics.

This ATG doesn’t replace the Form 8823 Guide, which was written to help state housing agencies evaluate taxpayer compliance with LIHTC requirements and report noncompliance to the IRS. The two documents are complementary, however, and the Form 8823 Guide is referenced in the ATG rather than duplicating information.

Summary of Revisions

Here’s a rundown on the revisions in the new ATG:

Chapter 2, Precontact Analysis: This chapter provides guidelines for analyzing tax returns before contacting the owner to determine which items related to the tax credit should be examined. The updated version now includes an explanation of documents to request from the owner during the audit with reference to the relevant chapters in the ATG [Exhibit 2-1, IDR & Crosswalk to Issues].

Chapter 7, No Longer Participating in the IRC §42 Program: This chapter discusses audit issues resulting from a state agency’s determination that a building is entirely out of compliance and is no longer participating in the LIHTC program. The updated version includes an expanded discussion of the state agencies’ authority to determine that a building is no longer participating in the program.

Chapter 8, Eligible Basis: This chapter provides guidelines for determining the dollar value of assets includable in eligible basis.

• In the update, the definition of “Residential Rental Property” has been expanded to reference Notice 88-91, which explains that a townhouse can be a “qualified low-income building” along with apartment buildings, single-family dwellings, row-houses, duplexes, and condominiums.
• Also, the discussion of deferred developer fees clarifies that a deferred developer fee may be documented by a note or by another document.

Chapter 12, Applicable Fraction: The applicable fraction is the percentage of rental units in a building that qualify as low-income units.

• A new section titled “Units Occupied by On-Site Managers, Maintenance Personnel, and Security Guards” was added. Audit techniques for this issue are also outlined in this chapter.
• A new section titled “Emergency Housing Relief” was added and it references Revenue Procedures 2007-54 and 2014-49.
• The section entitled “Deep Rent Skewing” in this chapter was revised to correct a technical error. The list now correctly explains that, for deep rent-skewed units, the gross rent does not exceed 30 percent of the income limit applicable to the individuals occupying the unit.
• “Casualty Losses in Federally Declared Disaster Areas” was expanded to include reference to newly released Revenue Procedure 2014-49.
• “Project Defined” now includes Treasury Regulation Section 1.103-8(b)(4)(ii) as a reference, as well as IRC Section 42(g)(7).

Chapter 17, Examples: This chapter was expanded to include a new section titled “Partial Disallowance of Credit During the 10-Year Credit Period.”

Appendix C, Treatment of Assets/Costs for IRC §42 Purposes: This appendix expanded on a list of the types of costs taxpayers typically incur when developing low-income housing and how the cost should be treated. The list is not exclusive:

• Accounting Costs are separately addressed.
• A new category titled “Acquiring Occupied Building: Tenant Relocation Costs” has been added.
• The section titled “Real Estate Taxes” has been expanded to include taxes incurred during the pre-production period.