Set Strong Anti-Fraud Policy to Encourage Disclosure of All Assets

Applicants and residents who lie about their income or student status cause big problems for tax credit owners and managers. Many applicants lie about their qualifications for the tax credit program because they think this will increase the chances that they'll appear eligible to occupy a low-income unit and pay below-market rent.

In many instances, applicants won’t disclose assets such as bank accounts. In one recent case, an owner successfully evicted a resident for failing to report funds that he held in accounts at a bank in a neighboring state. The accounts were jointly opened with his mother, a non-household member. The owner alleged that he intentionally hid those funds in order to become income eligible to rent the unit. If the income from these unreported accounts had been combined with the resident's reported income, he would have been ineligible for the unit. And the owner alleged that the resident continued to misrepresent his total income and assets on his annual required recertifications for the unit in substantial violation of his lease [501 W. 4th Street Assoc. LLC v. Annunziata, June 2012].

The IRS takes such fraud very seriously. According to the IRS, “Low Income Housing Credit property owners should demonstrate due diligence to prevent tenant fraud. Fraud includes deliberate misrepresentation of fact in order to induce someone else to part with something of value or surrender a legal right. In this case, the outcome of deliberate misrepresentation by a tenant can result in the property owner renting a residential unit to an ineligible tenant at a below market rate" [Guide for Completing Form 8823, p. 25-1].

The guide goes on to outline the steps the owner needs to take to bring the unit back to creditworthiness. If fraud is discovered, the owner should "consult state or local landlord-tenant laws to determine whether the tenant can be asked to vacate the Low Income Housing Credit unit or raise the rent to the market rate. The owner is not expected to complete the annual recertification if a tenant is asked to leave or an eviction proceeding is in process.”

When applicants and residents aren't truthful about their qualifications, they endanger your compliance efforts and put the owner's tax credits at risk. We'll discuss how to place the correct valueon bank accounts held jointly with non-household members and how to put in place an anti-fraud policy to discourage applicants and residents from lying about their qualifications.

Bank Accounts Held Jointly with Non-Household Members

Sometimes a household member holds a bank account with someone who isn't a member of the household. When an applicant discloses this information, as part of your job of calculating a tax credit household's income eligibility, you need to determine how much of that joint account belongs to the household member. The HUD Handbook, which tax credit sites are required by law to use when calculating income, gives guidance on how to handle this.

In the case cited above, the site's compliance director discovered the hidden bank accounts when she compared the resident's Tenant Income Certification (TIC) packet and his submitted tax returns. The TIC stated zero under annual income from assets while his tax return showed $806 entered under taxable interest. She then testified that when recalculating the resident's income based on the additional accounts, he would have been "over-income," meaning that his income would have exceeded the maximum income qualification for a low-income unit.

Prorate assets or divide them evenly among owners. According to HUD, bank accounts are "assets." Whenever you certify or recertify a household, you must list the household's bank accounts and specify the value of each one. If an account is held either individually by a household member or jointly by household members, you simply enter the full account balance. But if a household member holds an account jointly with someone who isn't a household member, you must determine whether a certain percentage of the account has been earmarked for the household member. If a percentage is specified (for example, in bank account records), assign that percentage of the asset to the household member. This is known as "prorating."

If you can't figure out what percentage to attribute to the household member, HUD says to split the account balance evenly between the two account holders [Handbook 4350.3, par. 5-7(D)].

Consider special circumstances. Sometimes a household member's name appears on a joint account as a convenience and not because the money belongs to the household member. In this situation, don't count any money in the account as belonging to the household member [Handbook 4350.3, par. 5-7(D)(2)]. For example, a household member who holds an account jointly with his mother, who doesn't live in his unit, may appear on the account so that he can get money for his mother if she can't get to the bank herself. In this case, don't count any portion of the account as belonging to the member.

If a household member tells you that his or her name appears on an account for this reason, ask the household member for proof. There should be power of attorney paperwork that the household submitted to the bank when the account was set up indicating that he or she doesn't have an ownership interest in the account. Or the household member could provide a copy of tax reporting forms showing that the other account holder is solely responsible for paying income taxes on the interest generated by the account.

In the case above, the court disregarded the resident’s attempt to claim little or no knowledge of the accounts. The resident couldn’t adequately explain why the accounts weren’t listed during certification and recertifications when they were clearly his joint assets and why he paid taxes on the related interest if he had no ownership interest.

Adopt Anti-Fraud Policy to Discourage Lying

You can do something to discourage your applicants and residents from lying about their qualifications. Add a tough anti-fraud clause to your lease and give them a notice in their application packet that makes clear that applicants and residents must be honest about their income and student status. For an example of language you can use, see our Model Notice: Warn Applicants Against Lying About Their Qualifications.

If applicants understand before signing the lease that they can be evicted if they misrepresent or hide information about their income and student status, they'll take your questions more seriously and think twice before being dishonest. And once they become residents, they'll understand that continuing to provide you with accurate information about their income and student status each year is important.

You can adapt our Model Lease Clause: Protect Yourself Against Residents Who Lie About Their Qualifications, to protect yourself against fraud. It gives you the right to evict residents if you discover that they lied or hid information at their initial certification or at any annual recertification. Your lease clause, like ours, should do the following:

1. Say that giving accurate income and student status information is essential. Your lease clause should make clear that federal law and the IRS require applicants and residents to answer all your questions about their income and student status truthfully and completely. Say that the income and student status information they provide during their initial certifications and at each annual recertification determines whether they qualify for a low-income unit.

2. Warn against giving incorrect information or hiding information. Your lease clause should caution residents against purposely giving false or incomplete information about their qualifications at any time.

3. Say that fraud triggers eviction. Your lease clause should warn residents that their occupancy depends on their being truthful about their qualifications at their initial certifications and at each annual recertification. If you discover, at any time during the lease term, that a resident lied or hid information, you have the right to evict that resident from your site.

4. Require residents to initial next to clause. It's a good idea to add a line next to this lease clause for residents to initial, recommends tax credit consultant A.J. Johnson. Even though residents who sign your lease are bound by this clause, having them add their initials removes any doubt about whether they read or understood the clause before signing the lease, he explains.

It's also important to caution applicants against lying about their qualifications before they begin giving you information about their eligibility. To do this, include a warning notice at the front of the materials you give applicants for low-income units. Your notice should tell applicants that federal law and the IRS require them to give truthful, complete answers about their income and student status; and warn applicants that if you lease them a low-income unit but later discover that they lied about their qualifications, the lease will give you the right to evict them from the unit.

Insider Source

A.J. Johnson, HCCP: President, A.J. Johnson Consulting Services, Inc., 3521 Frances Berkeley, Williamsburg, VA 23188; www.ajccs.net.