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Individual Tax

Final regs amend rules for monitoring housing credit compliance

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

TD 9848Reg. §1.42-5

IRS has issued final regs that amend the existing compliance monitoring regs concerning the low-income housing credit.

Background. Code Sec. 42(m)(1) provides that the owners of a building that would otherwise qualify for the low-income housing credit, are not entitled to the housing credit dollar amount that is allocated to the building unless, among other requirements, the allocation is pursuant to a qualified allocation plan (QAP). A QAP provides standards by which a State or local housing credit agency (Agency) or its Authorized Delegate within the meaning of Reg. §1.42-5(f)(1) is to make these allocations. A QAP also provides a procedure that an Agency must follow in monitoring for compliance with the provisions of Code Sec. 42. A plan fails to be a QAP unless, in addition to other requirements, it provides a procedure that the Agency (or an agent or other private contractor of such agency) will follow in monitoring for noncompliance with the provisions of Code Sec. 42 and in notifying IRS of such noncompliance which such Agency becomes aware of and in monitoring for noncompliance with habitability standards through regular site visits. (Code Sec. 42(m)(1)(B)(iii))

Reg. §1.42-5 describes some of the provisions that must be part of any QAP. As part of its compliance monitoring responsibilities, an Agency must perform physical inspections and low-income certification review.

Final regs amend rules for monitoring. IRS has now issued regs that make the following changes to  Reg. §1.42-5, the requirement to conduct physical inspections and review low-income certifications and other documentation.

 The 20-percent rule.  Rev Proc 2016-15, 2016-11 IRB 435, provides that the U.S. Housing and Urban Development (HUD) Real Estate Assessment Center Protocol (the REAC protocol) satisfies both Reg. §1.42-5(d)and the physical inspection requirements of Reg. §1.42-5T(c)(2)(ii) and Reg. §1.42-5T(c)(2)(iii). The revenue procedure provides that, in a low-income housing project, the minimum number of low-income units that must undergo physical inspection is the lesser of 20% of the low-income units in the project, rounded up to the nearest whole number of units, or the number of low-income units set forth in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart in the revenue procedure (the REAC numbers). The revenue procedure also applies the same rule to determine the minimum number of units that must undergo low-income certification review.

In the preamble to TD 9753, IRS expressed concern about application of the 20-percent rule for projects with a relatively small number of low-income units. The concern was that, in smaller projects, physical inspections and the low-income certification review of 20% of units (even a representative random sample) may not produce a sufficiently accurate estimate of the uninspected units’ overall compliance with habitability and low-income requirements. The preamble further stated that IRS intended to consider replacing Rev Proc 2016-15 with a requirement that does not permit use of the 20-percent rule for projects with a relatively small number of low-income units.

The final regs remove the rule that allows minimum sample size to be the lesser of 20% of the total number of low-income units or the minimum unit sample size set forth in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart. Instead, under the final regs, Agencies must inspect no fewer units than the number specified for projects of the relevant size as set forth in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart. IRS has determined that the REAC numbers produce a statistically valid sampling of units. (Reg. §1.42-5(c)(iii)(B))

Agency notice of inspection.  Existing regs require an Agency to select low-income units to inspect and low-income certifications to review in a manner that will not give advance notice that a particular low-income unit (or low-income certifications for a particular low-income unit) will or will not be inspected (or reviewed) for a particular year. The temporary regs do allow an Agency to give an owner reasonable notice that an inspection of the building and low-income units or review of low-income certifications will occur. The temporary regs provide that reasonable notice is generally no more than 30 days, but they also provide a very limited extension for certain extraordinary circumstances beyond an Agency’s control such as natural disasters and severe weather conditions.

The final regs reduce the 30 days to 15 days and continue to allow for an extension under the same circumstances as previously. The final regs also clarify that an Agency may notify the owner of the particular low-income units for inspection only on the day of inspection.  (Reg. §1.42-5(c)(iii)(C))

Effective date.  IRS notes that it is aware that additional time may be needed for Agencies’ QAPs to be amended. As a result, the final regs allow Agencies a reasonable period of time to amend their QAPs, but QAPs must be amended no later than Dec. 31, 2020. (Reg. §1-42-5(h)(2))

References: For the low-income housing credit, see FTC 2d/FIN ¶L-15701United States Tax Reporter ¶424.

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