Tips for a successful audit Preparing for a tax credit monitoring review NC Affordable Housing Conference November 1, 2011

Staying in Compliance To be in compliance: Units must be occupied by certified, income eligible households at restricted rents Be rented to non-transient households Maintain a condition suitable for occupancy Project must meet the minimum set aside Be available to the general public The key to compliance is thorough documentation!

From Applicant to Tenant: A 4-Step Process 1.APPLY 2.VERIFY 3.QUALIFY 4.CERTIFY

A good Application or Questionnaire serves as your road map! Lists all Household Members Lists the Student Status of all Household Members Asks specific questions about Income & Assets of all Household Members

Whose Income Is Counted? Head/Co-head – ALL income Spouse – ALL income Other Adults – ALL income Dependents Under 18 – Only unearned income Dependents FTS Over 18 – Unearned income, plus up to $480 of earned income Foster Child/Adult – Include income of Foster Child/Adult as appropriate, but do not include payment for the care of Foster Child/Adult Live-In Aides – NO income is counted

Determining Annual Income: What’s Included? Net asset income Gross wages Unearned income Payment in lieu of earnings Recurring contributions Listed in HUD Exhibit 5-1

Determining Annual Income: What’s Excluded? Earnings in excess of $480 for each full- time student 18 years old or older, except Head, Co-Head or Spouse Loans Temporary, nonrecurring or sporadic income Special “Hostile Fire” pay received by a household member serving in the armed forces An extensive listing found in HUD Exhibit 5-1

Determining Annual Income: What’s Excluded? Good Rule of Thumb: If it is not specifically excluded by HUD, include the income in total household income.

Assets Bank Accounts Cash on Hand Debit Cards Revocable Trusts Investments IRAs & Keoghs Retirements Plans Lump Sum Receipts Deeds of Trust (Homes) Life Insurance – Cash Value Personal Property (Cars, Jewelry) Indian Trust Land Term Life Insurance Business Assets Inaccessible Assets Included: Excluded:

Qualifying a Household Make all of the necessary calculations to determine the household’s annual income Carefully compare anticipated income to the applicable income limits

How to Qualify Household Use a separate Income & Asset Calculation Worksheet Show the steps of your calculations Don’t round until the final calculation If using calculator tapes, attach them to a blank sheet of paper Calculator tapes that obscure info on the verification can cause noncompliance

Tenant Income Certifications The required documentation certifying household eligibility for initial occupancy and annually thereafter Should only be executed after the verification process is completed Do not allow households to sign blank TICs that you fill in later Do not allow the household to complete the TIC

Self-Check for Tenant Files Rental Application Proper Verifications Income Certification Initial Lease Consistent file order is the best method of determining whether there is missing documentation.

Other Items Reviewed A tax credit audit will include a review of the following:  Rent Roll  RCRS data entry  Utility Allowance Documentation  Supportive Services Documentation, if required  Physical Condition of the Property

Common Sense Approach Simplify! Be Consistent! Avoid Conflicting Information!

TRICKS of the Trade What you always wanted to know, but were afraid to ask! The secret tips we don’t tell you!

Excess Documentation Submitted For the Desk Audit What we don’t see can’t hurt you What we do see might hurt you

Credit Reports Look for deferred student loans. Student loans are typically only deferred while you are a full-time student. This is one way to catch discrepancies on student status. Look for mortgages. This may reveal assets (land, home, etc) that the household forgot to tell you about. Watch for consistency in applying the Tenant Selection Policy

Criminal Reports Watch for consistency in applying the Tenant Selection Policy to help avoid Fair Housing complaints

Bank Statements Banks frequently charge for verifications; therefore, it is common for you to collect bank statements as verification of assets You must include all pages of the statement for the verification to be complete, not just the page showing a single account balance Look for deposits that reveal income the family neglected to disclose

Errors in Logic Income = $0 Assets always = $0 Gross Rent > Income Decrease in pay/benefits with no explanation

Common Errors Found in Files Failure to verify disclosed items Incomplete verifications Writing on verification forms Overtime and bonuses not included in income Failure to use highest calculated income

Common Errors Found in Files Miscalculated Assets White-out used on forms Including Social Security #s, bank account #s, etc in file info sent to NCHFA Clarification statements that do not provide new information Clarification statements should not substantially contradict the verification

Tips for Staying in Compliance Adequate documentation is #1 (Unit is not eligible unless you can prove it!) Document EVERYTHING Self-monitor to ensure compliance Have a second set of eyes review each move-in Organization is important!! Maintain consistent tenant files Create a Project Data File Attend training

Record Retention Files for households that initially qualify the unit as a tax credit unit:  Must be retained for 21 years from the due date of the tax return for the first year of the credit period Subsequent years files:  Must be retained for 6 years beyond the due date of the tax return for that year

Project Data File – Every property should have a binder that contains all of the documents necessary to maintain compliance. Suggested items to include:

Project Data File Tax Credit Application QAP All Loan Documents LURA 8609 for each building Utility Allowance Documentation Income & Rent Limits for each year Required annual reports to NCHFA Monthly rent rolls List of vacant units & compliance with NAU rule

Most Important Key to Success: Proper Training!

Certifications accepted by NCHFA: Housing Credit Certified Professional  HCCP  Sponsored by National Association of Home Builders  Credit Certified Compliance Professional  C3P  Sponsored by Spectrum Enterprises 

Certifications accepted by NCHFA: Tax Credit Compliance System  TaCCS  Sponsored by Quadel  National Compliance Professional  NCP  Sponsored by Housing Credit College 

Certifications accepted by NCHFA: Tax Credit Specialist  TCS or e-TCS  Sponsored by National Center for Housing Management  Specialist in Housing Credit Management  SHCM  Sponsored by National Affordable Housing Management Association 

Professional training is not enough. You also need to: Know the requirements of your state agency and Fulfill your obligations as required by your state

NCHFA Sponsored Training  Agency-sponsored training available across the state  Recommend leasing staff attend at least one training session per year to keep up with changes in rules and procedures

Physical Inspections NCHFA uses the Uniform Physical Condition Standards (UPCS) as the inspection standard. The goal of the UPCS inspection is to:  Measure physical condition of the property  Objective and consistent manner  Accommodates all property types & configurations

Physical Inspections UPCS inspectable areas: Site Building Systems Exteriors Common Areas Units Health and Safety

Physical Inspections Levels of Physical Noncompliance –Level 1-Minor –Level 2- Major –Level 3- Severe All UPCS violations are reported to the IRS, regardless of severity per 8823 guide instructions (Tip)

Physical Inspections Example of Levels:  Level 1-Minor: 1” to 8 ½” x 11” hole in sheetrock that does not go through both sides of wall  Level 2-Major: > 8 ½” x 11” hole in sheetrock that does not go through both sides of wall.  Level 3-Severe: Hole in sheetrock that penetrates to the next room OR two or more walls have level 2 damage

Physical Inspections Health and Safety Violations Exigent (life threatening) Any deficiencies noted under this category:  A list of the deficiencies will be left with management staff  All exigent deficiencies must be corrected within 24 hours Non-life threatening  A list of the deficiencies will be left with management staff

Physical Inspections Tips for Successful Inspections: Notify all residents of the inspection Ask residents to raise blinds and remove all items from window sills prior to inspection Check smoke detectors and batteries prior to inspection Inspect property for violations prior to inspection

Physical Inspections Common Noncompliance Issues: Blocked egress (Tip) Inoperable smoke detectors Trip hazards Broken or cracked electrical sockets or light switch covers

Types of Noncompliance IRS Noncompliance –  Issues addressed in the 8823 Guide published by the IRS  Examples: Household over-income at move-in Violation of Next Available Unit Rule Violation of Student Rules Lack of proper Utility Allowance documentation Physical Inspection Violations  8823 will be issued

Types of Noncompliance State Noncompliance –  Issues important to NCHFA that we expect the owner to address to remain in good standing with the Agency  Examples: Failure to maintain the required number of units at required lower set-asides Failure to recertify annually for properties with Agency loans  No 8823

Types of Noncompliance Program Noncompliance –  Violations of program requirements that are not violations of the tax credit program  Examples: –Violation of Low HOME rent requirements –Violation of HOME lease requirements –Violation of Key program income requirements  No 8823

Top 5 Reasons for 8823s Issued in Owner failed to submit the Annual Owner’s Certification of Continuing Program Compliance 2.UPCS Violations 3.Owner did not properly calculate Utility Allowance 4.Improper or Inadequate File Documentation resulting in Tenant Over-Income at Move-In 5.Owner failed to respond to Agency request for monitoring review

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