Key Takeaways
- Form 8823 is the tool state agencies use to report LIHTC noncompliance to the IRS, guided by the IRS’s 8823 Handbook to ensure consistent interpretation of Section 42 rules.
- LIHTC owners are given a correction period of up to 90 days once noncompliance has been found before the credit agency notifies the IRS.
- Noncompliance spans many areas: income/rent violations, occupancy issues, physical condition failures, documentation gaps, and more.
For those unfamiliar with the Low-Income Housing Tax Credit Program (LIHTC), the number 8823 may have no particular meaning. However, if you are involved in the development, ownership or management of properties utilizing this federal affordable housing program then it should be part of your knowledge base for a thorough understanding of LIHTC. Internal Revenue Service (IRS) Form 8823 and its accompanying handbook, the Guide to Completing Form 8823, are critical pieces to the rather complicated puzzle of establishing and maintaining compliance with the program’s federal regulatory requirements as detailed in Section 42 of the Internal Revenue Code.
What is Form 8823?
State agencies use Form 8823 to notify the IRS of noncompliance with the requirements of IRC §42 or fulfill other reporting requirements. In 2011, the IRS gave guidance in the form of the 8823 Guide to provide direction to state agencies in identifying and reporting noncompliance as well as identifying and reporting the status of returning to compliance.
The 8823 form itself is utilized by housing credit agencies, who have compliance oversight of LIHTC properties, when reporting noncompliance findings to the IRS during the initial 15-year compliance period. These forms are filed on a per building basis, determined by the Building Identification Numbers (BINs), and include provision for other relevant building information along with a laundry list of noncompliance issues identified by the IRS. These issues are covered in items 11a-q on the form and include examples such as household income being above the income limit at initial occupancy, the gross rents exceeding the tax credit limits, and violations of the Vacant Unit Rule. Upon conclusion of their compliance monitoring reviews, the housing credit agencies complete the form by checking the applicable boxes by line item, indicating whether the building was found out of compliance and if the noncompliance has been corrected in the meantime (LIHTC owners are given a correction period of up to 90 days once noncompliance has been found before the credit agency notifies the IRS). The 8823s are then submitted to the IRS for its records and it is at the IRS’s discretion as to whether there will be follow-up to the findings, which could potentially result in the loss of tax credits to the project’s investors.
Corrected vs Uncorrected 8823’s
A corrected 8823 shows the IRS that the agency found a compliance issue, gave the owner adequate time to fix it, and that the owner resolved the problem and returned to compliance.
An uncorrected 8823 signals ongoing concerns and requires diligent follow-up by the owner to fix the issues and keep the state agency updated. Key dates matter: Form 8823 lists the earliest date the building fell out of compliance and the date all issues were fully corrected, which isn’t recorded until every affected unit is back in compliance. If a prior 8823 was uncorrected, line 10 is checked when the project finally returns to compliance.
Common Reasons for Noncompliance
Below are common reasons we’ve seen to 8823 noncompliance:
Income & Rent Violations
- Household income was above the income limit at initial move-in.
- Gross rents exceeded LIHTC rent limits (including utilities).
- Rent was improperly charged when a unit failed the Vacant Unit Rule (e.g., not making reasonable attempts to rent the unit to income-qualified households).
- Improper application of income recertification rules, such as missing annual recertifications (for properties placed in service before 2009 where required).
Unit & Occupancy Issues
- Units were not suitable for occupancy, often due to physical condition failures (health, safety, or building code violations).
Units were not actually occupied by income-qualified households when required. - Violations of the Available Unit Rule (AUR), such as renting a comparable unit to an over-income household before correcting the status of an existing over-income unit.
- Insufficient number of low-income units to meet minimum set-aside requirements (e.g., 40/60, 20/50 tests).
- Units held for employee use but not properly excluded or certified, resulting in miscounted LIHTC units.
Recordkeeping & Documentation Failures
- Missing or incomplete tenant files, including income verifications, leases, or student status documentation.
- Failure to maintain the required three-year tenant file records or six-year building records.
- Inaccurate or missing student status certifications, leading to ineligible full-time student households.
Student Rule Violations
- Renting to ineligible full-time student households that do not meet one of the allowed exceptions (e.g., TANF recipient, married, etc.).
Building / Programmatic Violations
- Failure to comply with extended-use agreement terms (e.g., improperly converting units or changing occupancy restrictions).
- Identity-of-interest issues or misuse of units not allowed under the regulatory agreement.
- Noncompliance related to transfers, dispositions, or ownership structure changes not properly reported.
- Issues related to amenities or services promised in the LURA but not provided.
Other IRS-Recognized Issues
- Claiming credits during periods a building or unit was not placed in service.
- Failure to satisfy general public use requirements (e.g., giving preference to specific groups not allowed).
- Fraudulent or knowingly false certifications in tenant files or reports.
Final Thoughts
First published in 2007, the Guide for Completing Form 8823 was a long-awaited companion piece to the 8823 Form as practitioners were urgently seeking IRS interpretation of the Section 42 regulations in order to better manage LIHTC properties. The Guide’s chapters follow the same order of the noncompliance issues listed in items 11a-q of the Form 8823 and provide concrete examples of what the IRS considers to be in compliance with each provision, out of compliance and back in compliance. In the opening chapter, the IRS is clear that the Guide is written for housing credit agencies when preparing Form 8823, however it also provides vital clarification for the industry with regard to its federally recognized noncompliance topics. Thus, the Guide helps to ensure greater consistency in interpretation of the regulations among housing credit agencies and in how the agencies cite and report noncompliance issues to the IRS.
The Form and Guide can be found online at:
Form IRS 8823: https://www.irs.gov/pub/irs-access/f8823_accessible.pdf
Guide to Form 8823: https://www.irs.gov/pub/irs-utl/lihc-form8823guide.pdf
8823 and LIHTC Training
Understanding all angles of Form 8823 require time, expertise, and even training. Our LIHTC Certification Course walks through 8823 as well as other IRS forms, eligibility criteria, rent restrictions, utility allowances, and many other concepts critical to running a successful Section 42 property.