IRS Drafts Section 42 Audit Technique Guide

            At the conclusion of last month’s HMU article, I made reference to the publication of the IRS Audit Technique Guide for Section 42 properties.  To correct myself, let me emphasize here that it was published in DRAFT form in December of last year and has its public comment period open until March 28, 2014.  That means, of course, that any industry practitioners who wish to comment on its content may do so for the IRS’s consideration before it is published in its final form, which I presume will be later this year.

            You may be wondering at this point “What is the Audit Technique Guide?”
And “Why should it concern me?  I’m just a Low-Income Housing Tax Credit property manager.”  Let’s discuss this as I believe those are two valid questions worthy of review.  The Audit Technique Guide “was prepared to assist IRS examiners audit taxpayers, usually partnerships, owning IRC Section 42 low-income housing projects”.  So, just as the IRS’s Guide to Completing Form 8823 was written to assist state housing finance agencies in reviewing Section 42 properties for compliance, the audit technique guide was written for IRS audits of these same properties.  The reason that it should concern those of us interested in management of these properties is that like the 8823 Guide, it gives us additional insight into the IRS’s interpretation of the Section 42 regulations and helps round out our understanding of the tax credit program.  In particular, it allows us to review the key components of LIHTC from an auditor’s perspective.

            The audit technique guide consists of twenty chapters, in nine parts, plus ten appendices that include case law to illustrate examples of litigation concerning issues of Eligible Basis, Credit Recapture, and Nonprofit Participation, among others.  The chapters read in the same order as an audit should be performed and each concludes with a chapter summary.  In lieu of reading the entire document, which of course you may if interested, I would suggest reading the chapter summaries with the exception of two sections of the guide.

            Chapter 12 which is entitled “Applicable Fraction” consists of 46 pages and covers numerous topics of concern for management, such as income qualified households, rent restrictions, suitable for occupancy, the available unit rule, the vacant unit rule, general public use and transient use, and the minimum set-aside in addition to computing the applicable fraction.  These are all issues that we touch upon in our Tax Credit Specialist (TCS) course and they all have relevancy for managers in terms of meeting and maintaining compliance standards at LIHTC properties.  This chapter is certainly worth the read for managers concerned with deepening their understanding of the program.

            The other section that in particular I feel is worthy of note for management is Appendix A, the Glossary of Terms.  We talk about each federal housing program having its own distinct language.  If you want to learn “LIHTC Speak” or test your fluency in it, this is a great reference piece for your housing credit vocabulary.  Even after 20-plus years of experience working with this program, I picked up a new thing or two when I read it.  I think it would certainly be worth your while for review.

            Anticipating your next question, let me pass along a link to the audit technique guide here for your assistance.  It can be found at: http://www.compliancesupport.com/pdfs/news/DraftIRC42ATG-2014-01.pdf.  And keep in mind that additional questions about the guide or any other LIHTC-related issue can be addressed to my attention via NCHM’s eHotline at www.nchm.org.