2001 Tax Credit Compliance Rules

• Unit inspection standards
• Impact on issuance of Form 8823
• Inspection coordination
• Compliance monitoring costs
• Issues with 20% requirement
• Who should conduct the inspections?
• Which units to inspect?
• How should the inspection process be handled?
• How to deal with vacant units?
• What about buildings and amenities?
• What records should be kept?

The biggest change the IRS made with the 2001 tax credit compliance requirements is mandate that not only 20% of files in a project be reviewed, but also that the same units be physically inspected each year. So if they look at the file for unit 101, they must also inspect the unit. (More about unit matching later in this article.) The next change was that instead of a choice of minimum inspection standards, the IRS has now set one standard that requires all new projects to be inspected within two years after its last building is placed in service and all other projects once every three years. Another requirement is that the common area of each building be inspected. The new regulations were published January 14, 2000 and became effective January 1, 2001. To read the final regulations, visit

Unit inspection standards

The new regulations give the states a choice of physical inspection standards to use, either the Uniform Property Conditions Standards (UPCS) or local building codes. A survey by Affiliated Compliance & Consulting showed that almost all states use the UPCS standard (78% of respondents). Some states use a combination of both standards. And a few states are using the Housing Quality Standards that were commonly used before the UPCS came out.

How can property owners and managers know more about these standards? Many states have attempted to communicate information about them to their tax credit housing constituents. States who conduct training have been including this information in their sessions. If you are unclear about the requirements, please contact a member of the compliance monitoring team for your state to see what their requirements are.

Impact on issuance of Form 8823

Unit inspection concerns have certainly caused an increase in issuance of 8823s. The Affiliated Compliance & Consulting survey showed one-third of the states surveyed found reportable unit deficiencies. One even said it also had found that promises made about amenities in the tax credit application had not been fulfilled on-site. Like it or not, states are demonstrating the value of these inspections as owners are held accountable for their promises.

This is precisely what Congress wants to accomplish. Why? Because Congress wants this program to be a success. One doesn’t have to look very far back in the history of government housing to see why housing stock preservation is high on the list of priorities for Sec. 42. One of the key elements to that success is to keep the projects in safe, habitable condition from day one. This is new for everyone, and we all need to be prepared for the inevitable ups and downs as this new requirement gets under way.

Inspection coordination

This additional task of unit inspections has added a considerable burden to state agencies, many of which are already stretched beyond their resources. Some of them are separating the tasks into two separate functions – one entity conducts the file inspections, another conducts the unit inspections, and they usually are not done at the same time. The survey showed that the majority of states (78% of respondents) still are conducting all of the work in-house with their own staffs; however, 22% of states responding to this survey are using independent consultants to perform part of the work, primarily unit inspection.

The “unit matching” requirement affects the coordination of these events. As mentioned briefly above, the IRS requires that if a file has been reviewed, then the same unit must be inspected. For states that are using this separate time/event technique, the challenge of matching units and files gets to be interesting, especially if the household has moved before the unit inspection is done. The survey showed that more than 50% of the states would like the IRS to abort the “unit match” requirement. It’s simply too difficult. As one agent commented, “even when we do both events at the same time, there have been instances where a household has refused to answer the door or has claimed there is an illness in the family and don’t want us to enter. We respect that and inspect a different unit. But does that mean we have to go back and check that file also? We need ‘flexibility.’”

Whatever method states employ, do not be surprised by separate inspections whether the state uses two departments within the agency or independent consultants. Special skills are required for each type of inspection event, and many housing professionals are skilled in one area but not the other. Is it hard on your staff? Yes. Inconvenient for households? Yes. But it will not go away because it is accomplishing the desired results.

Compliance monitoring costs

Many states have had to increase their monitoring fees in order to cover the cost of additional unit inspections. The survey indicated that 43% have increased fees. The range of increase has been $2 to $30 per unit, with the average increase being $13.33 per unit. Some states (10%) have converted to a project compliance monitoring fee for the entire 15-year compliance period, ranging from $200 to $375 per unit. Ten percent anticipate some change in the near future. Forty-seven percent have not changed their fees and indicated no intention to do so.

Issues with 20% requirement

The requirement that 20% of the units be reviewed each year becomes a significant burden for larger tax credit projects. A number of states in the survey recommended that the IRS require inspection of a lower percentage of units, or a fixed number of units (for instance, not to exceed 30 to 35 units) on larger sites.

If you have a 200-unit project, under the current requirement, 40 units must be physically inspected, and those same 40 units must have their files inspected each year. The larger the project, the more significant the investment of time and effort.

Many believe that reduction to 10% to 15% would not damage the intent of the inspections. One analyst observed that statistically, “there is only a 3% variance in findings whether 200 units are reviewed or 2,000.” In other words, a smaller sampling will reveal the problems as efficiently as a large one. Another recommended that the percentage be lowered with the understanding that if significant problems were discovered in that sampling, a more thorough review should be required.

Understanding the nuances of new unit inspection procedures

Sec. 42 tells us that each unit must be “suitable for occupancy” at all times. To determine what the IRS means by “suitable for occupancy,” look to Sec. 42, the Final Monitoring Regulations and to Form 8823 (Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition – the form the state agency uses to report noncompliance to the IRS).

Sec. 42 states “the suitability of a unit for occupancy shall be determined under regulations prescribed by the secretary taking into account local health, safety, and building codes.” In the Final Monitoring Regulations, the state agency is directed to make the determination based on local health, safety and building codes, as well as the uniform physical condition standards for public housing established by HUD.

The agency also must review any health, safety or building code violations. IRS Form 8823 Line 10b is used to document violations of health, safety and building codes. The instructions for the form direct the monitoring agency to report noncompliance issues regarding everything from structural, roof, electrical and plumbing problems to pest infestation, lighting issues and smoke detectors that are not working. This means that a faulty light bulb in a common area or a roach-infested apartment could cost the property tax credits.

Looking to line 10c, a pattern of minor violations of health and safety issues also is noncompliance. These minor violations are defined as “those that require correction but do not impair essential services and safeguards for tenants.” Recurring problems in a particular unit such as a faulty electrical outlet or a plumbing problem also could lead to a loss of credits.

Who should conduct the inspections?

To prevent noncompliance and correct any existing issues, the manager and the maintenance supervisor should conduct the inspections together. Managers often see things that the maintenance supervisors miss, and vice versa, due to the very different perspectives each profession has. The maintenance supervisor should be prepared to make small repairs such as minor plumbing leaks and replacement of smoke detector batteries.

If it is impossible for the maintenance supervisor and manager to perform the inspections together, it is recommended that two staff members do so. In cases of unsanitary living conditions or damage to the unit, it is much better to have two witnesses if it is necessary to file for an eviction.

Which units to inspect?

Inspections of both occupied and vacant units should be scheduled and conducted on a regular basis. The frequency of unit inspections will vary based on several factors, including the age, size and type of the property, and on the resident profile. The one issue that should not affect the frequency of unit inspections is time. It is easy to procrastinate due to the lack of time for both the management and maintenance staff. Remember that the physical compliance of the property is just as important as the file compliance and that delaying inspections could cause existing problems to worsen. The best way to ensure the completion of unit inspections is to schedule them throughout the year, rather than waiting until the last minute.

How should the inspection process be handled?

Check with your landlord/tenant law to determine the proper notice for your residents. Prepare for the inspections by creating a form to document your findings. In the units, look for structural damage, roof and plumbing leaks, pest infestation, doors and windows that do not lock properly, electrical problems and structural problems. Test Ground Fault Interrupt (GFI) outlets, smoke detectors and other fire protection equipment. Check for moisture problems such as mold and mildew near windows. Document all of your findings and the correction of all problems found. In addition to the inspections, the maintenance staff should be trained to check for unit noncompliance during regular service calls and to notify the management staff of any issues found.

Some noncompliance issues are created by the residents’ living habits. Look for unsanitary living conditions and pest control issues. In some cases, it will be necessary to notify the resident of poor housekeeping habits and corrective measures that need to be taken. A re-inspection should be scheduled to follow up on these issues. If the resident fails to correct the problem, legal action should be taken. If there are pest control issues, contact the vendor for additional treatments and maintain documentation of the situation. Make certain that all detectors are in good working order, and reprimand residents who have removed or disabled the detectors.

How to deal with vacant units?

Vacant units also must be inspected and often are a source of noncompliance. Housing credit qualified units generate credits when vacant, as long as the household that most recently occupied the unit was properly certified. However, these units will not generate credits if they do not meet the suitability requirements. Too often, the maintenance staff will neglect preparing a unit for a future occupant if the unit is not reserved for a new tenant with a specific move-in date. The “turn” for a vacant unit often is given a low priority due to budget restrictions or staff limitations. It is important for the maintenance staff to realize the need for preparing vacant units as quickly as possible.

Another vacant unit issue is cannibalization: stealing parts from a vacant unit to make repairs in an occupied unit. Cannibalization should be avoided, as the cannibalized unit may not meet the housing credit requirements.

What about buildings and amenities?

Inspecting the outside of the building is as important as looking inside each unit. Check stairwells, breezeways, hallways and other common areas for trip hazards, fire hazards and other safety issues. Common heating systems should be inspected as well. Take a look at the general condition of the building and the parking areas. Make certain all common area lighting and exit lighting is working properly. Building numbers must be unobstructed and easy to read for fire, police and rescue units.

Prior to inspecting the amenities, check your regulatory agreement to determine what amenities the owner promised. There have been many cases of owners failing to replace items such as stereos, televisions and computer equipment when there has been theft or damage. Make certain that all promised amenities are in place, in good working order and available to the residents. If something is damaged or stolen, make certain to replace it with a comparable item.

State agency staff often will conduct “drive-bys” of properties when they are in the area. These cursory inspections can trigger full-blown audits if there are easily visible problems, such as trash, amenities that are not accessible to the residents or other problems. Make certain to drive through your community when the office is closed to see what happens after hours. Check the lighting in the breezeways and other common areas, and make sure any discrepancies are addressed immediately.

What records should be kept?

In order to document compliance, records of all completed service requests for the property, as well as records of preventative maintenance, scheduled inspections and pest control treatments should be kept. If the required repair is on hold due to parts that have been ordered, note the date of the order and expected delivery date. If a contractor is needed to complete repairs, a log of phone calls, bids and other pertinent information should be retained. Some maintenance staff write “done” or “completed” as a record of the work performed on the service requests. In housing credit properties, this type of documentation is unacceptable. As you all know, the three most important things in the program are “documentation, documentation and documentation.”

This applies to maintenance records as well as the tenant files. We all have had the resident whose children constantly throw toys in the toilet, causing a call to the maintenance staff. If the monitoring agency discovers that one unit has called in a clogged toilet numerous times during the year, they will assume that there is a history of minor problems unless the service requests state that the resident caused the problem.

Although unit and property inspections are time consuming, they are an integral part of housing credit compliance and must be taken seriously. Taking the time to walk through units will prevent noncompliance and help with budgeting and resident relations. Leaving your desk behind will give you a much needed break from the ringing phones and office stress and prepare you to pass your audit with flying colors.

Sharon Ivey, vice president of Elizabeth Moreland Consulting, Inc., and the Housing Credit College; and Ruth L. Theobald, CPM, HCCP, and president of TheoPro Compliance & Consulting, Inc., contributed to this report.