Use Checklist to Review Household Files for Completeness

It’s smart management practice to keep your household files up-to-date and complete all the time. Because LIHTC projects will be reviewed for compliance by the state and may be audited by the IRS, complete, well-organized files are very important.

Sloppy files will certainly raise a red flag during a formal review, signaling that you may not know what’s needed to be in compliance. On top of that, messy or incomplete files can create headaches for you and your staff in the day-to-day operations of your site. As part of a review, an auditor may ask you to pull a variety of files such as those for applicant households and check for required documents and information.

Whenever your household files are reviewed, if significant problems are identified such as missing items or information that should not be retained, it’s very likely that the reviewer or auditor will want to dig into files for other years and/or more files from the same year, searching for a pattern of mistakes or missing documents. As a result, you could face a total review of all files as well as additional reviews, both of which mean extra work and hassle for you and your staff. To make sure your files contain all the necessary documents and information, you can use our Model Form: Use Checklist to Ensure Household Files Are Complete.

Income

A major component of an audit is a review of the management’s procedures for qualifying new tenants and information gathered for income verification. Under IRC §42, the tenant is to provide the owner with information about the household and the total anticipated income they expect to receive during the next 12 months. Income includes, but isn’t limited to, earned and unearned income from household members age 18 and older, unearned income of minor children, and income from assets.  

An auditor may compare the income information in the tenant file with the income reported on the tenant’s tax return. You can identify the tenant’s wages, interest, Social Security, annuities, alimony, and other taxable sources. Generally, if the taxable income is more than the LIHC income limit, there’s a potential problem.  

The household file should include a list of all sources of nontaxable income. Nontaxable income includes, but isn’t limited to, deferred compensation payments, employer non-accountable allowances or reimbursements, nontaxable Social Security payments, insurance annuities, nontaxable retirement fund distributions, disability or death benefits paid, welfare assistance payments, child support, and regular contributions and gifts from person(s) not residing in the unit.  

Together, the income per tax return and the nontaxable income per tenant files will provide a reviewer with an estimate to compare to the tenant’s total anticipated gross income for each year. Generally, if the tenant’s taxable and nontaxable income is about the same as the anticipated gross income shown on the tenant certification, there’s no issue. On the other hand, if there’s a discrepancy, further analysis will be needed to determine whether the tenant is qualified.  

Size of Household

Since the income limit is dependent on the size of the household, an auditor will also take steps to determine whether the tenant’s file reflects all the members of the household. Auditors will look at initial leases, applications, and other documents to look for indicators of potential problems. These could include a single name on a lease for a unit with multiple bedrooms; tenant’s income (as reported in the file) isn’t sufficient to pay the rent and a reasonable estimate of living expenses; rent payments from more than one person; and separate leases with different names for amenities such as garage spaces.

File Retention

You should check whether your state housing agency has its own procedures for complying with the tax credit recordkeeping rules. Your agency may require you to keep additional documents in your household files to the ones stated in the checklist or to organize your documents in a certain way.

The length of time you’re required to keep documents relating to tax credit compliance depends on whether they relate to the first year of your tax credit site’s compliance period or a later year.

First-year documents. You must keep all documents related to the first year of your building’s compliance period for at least six years after the due date for filing the owner’s tax return for the 15th year of the site’s compliance period. This means that you must wait at least 21 years before discarding any first-year files.

Second- through 15th-year files. You must keep documents related to the remaining years of your building’s compliance period for at least six years after the due date for filing the owner’s tax return for that year.

Before you start discarding any files, confirm with your state housing agency that it’s okay to do so. Because you probably need to keep your site in compliance during the extended use period (which may extend 15, 30, or more years beyond the compliance period), your state housing agency may require you to keep certain files longer than the IRS requires.

Also, it’s important to keep the required documents in a safe place where you can easily locate them when you need them. Otherwise, you may not be able to get your hands on a document to prove your compliance. Here are some practical tips on how and when to keep your documents:

Keep duplicate copies off-site. Although it’s not required, keeping an extra set of all your documents in an off-site location can prove very valuable insurance. If you keep only one copy of your documents at your management office and, for instance, a disgruntled employee steals your documents, or fire consumes them, all of the owner’s tax credits may be in jeopardy.

Use fireproof cabinets to store files. Consider storing your original and duplicate sets of files in fireproof cabinets. Although the tax credit rules don’t require you to use fireproof cabinets, your decision to do so may one day save the owner’s credits.

Consider electronic storage, but take precautions. You can save space and money by scanning and storing some or all of your documents electronically. This could prove an efficient way to make a backup copy of your documents. But if you want to create electronic documents to replace your paper originals, check whether your state housing agency will let you do this. Because your agency must audit your documents, it may insist on seeing the original documents when it visits your site. Also, your agency may want assurances that your electronic documents haven’t been altered or tampered with—and will still be viewable in 20 years despite changing technology.