Common Section 42 Compliance Issues
Presented by Matt Rayburn
Compliance & Asset Manager
INTRODUCTION / DISCLAIMER
The purpose of this presentation is to discuss common compliance issues
identified by IHCDA Compliance Auditors during tenant file reviews.
This is not a full review of Section 42 compliance requirements.
For additional information on IHCDA’s compliance policies, please review the
2011 Rental Housing Tax Credit Compliance Manual.
For additional IRS guidance on types of noncompliance and how to remedy
noncompliance, please review the 8823 Guide.
TENANT FILES
Tenant files not maintained in a consistent order.
Tenant files do not contain all necessary documents:
1. Initial application for residency;
2. Tenant Income Certification Questionnaires for each year;
3. TICs for each year;
4. Verifications of all income and asset sources for each year;
5. Student status certifications for each year;
6. Any other documents used to verify eligibility;
7. Initial and subsequent leases and lease addenda; and
8. HAP Contract and all HAP Amendments for Section 8 voucher holders or the
50059 for project-based Section 8 tenants.
LEASES
•Lease contains prohibited fees or mandatory fees that are not included in the
gross rent calculation on the TIC (more on both of these issues later).
•Lease/lease addenda contains language stating that household will be
terminated if income exceeds 140% at recertification.
•Lease renewal addendum does not include new rental amount.
FORMS (GENERAL COMMENTS)
•Wrong forms used- IHCDA has three mandatory forms
• Tenant Income Certification (TIC) = Form #22 = 1 per household
• Tenant Income Certification Questionnaire = Form #23- 1 per adult member
• Student Status Certification = Form #35- 1 per adult member
•Forms signed but not dated
•Forms backdated
•Parts of forms filled in by tenant/applicant and other parts apparently filled in
later by management
•Whiteout or Sharpie used on forms
THE TIC AND QUESTIONNAIRE
Common issues with the TIC
•TIC not signed by all adult household members. This is mainly a problem at
recertifications when members who were previously under 18 are now older.
•Effective dates do not match anniversary date of move-in
•Signed and dated after the effective date
Common issues with the Questionnaire
•Only one form filled out per household instead of the required one per
household member.
•Tenant/applicant filled out all the yes/no column but did not provide any
additional information on items marked as yes.
TIC EXAMPLE
QUESTIONNAIRE
EXAMPLE
THE UNDER $5000 ASSET CERTIFICATION
This is the single form that is most frequently filled out incorrectly or
incompletely!
•Either item #2 or #3 must be checked. Both cannot be checked.
•If no assets are listed on the top, item #4 must be checked. If assets are listed,
item #4 cannot be checked.
•Item #5 should list the total household INCOME FROM ASSETS, not the total
cash value of assets.
•Form must be signed by all adult household members and only one form should
be completed per household. A separate form should NOT be completed by
each member since we are checking that the total household assets are under
$5000, not the total assets of one member.
UNDER $5000
ASSET
CERTIFICATION
EXAMPLE
VERIFICATION DOCUMENTS
•Owner/management did not verify all income/assets disclosed by the household
on its questionnaire
•Inconsistent or vague information on questionnaire or verification documents
not clarified by management
•Verification documents are outdated (older than 120 days prior to effective date
of certification)
•Verification documents were received late (after effective date of certification)
•Verification documents are incomplete, illegible, or otherwise insufficient
•No evidence that management attempted third-party verifications of any kind
(files all contain paystubs and bank statements)
CALCULATING INCOME & ASSETS
•Social Security incorrectly calculated using benefit amount before deductions
•Unemployment not annualized
•Year-to-date calculation not performed for employment income
•Bi-weekly pay incorrectly calculated by taking bi-weekly pay amount multiplied
by 24 instead of 26
•Confusion on bank accounts: savings must use current balance and checking
must use 6 month average balance
STUDENT STATUS
•File does not contain third-party verification proving a member is a part-time
student when full-time status would make the household ineligible.
•File does not contain third-party verification proving an exemption is met.
•File does not contain a separate student status certification for each adult
household member.
•Household was not all full-time students at move-in but later became all full-time
students but was allowed to stay in the unit. Unlike income, student status is an
ongoing eligibility determination.
COMMON MISCONCEPTION
• The student status rule does not apply unless all household members are full-time
students. We still see companies incorrectly believe they must find an exemption if
any members are full-time students or if there is a part-time student.
UTILITY ALLOWANCES
•PHA utility allowance not updated on time. NOTE: It is not the PHA’s
responsibility to contact you when there is an update. Therefore, you need to
check regularly.
•PHA utility allowance confused with allowances on IHCDA’s website.
•Utility company estimate confused with consumption estimate.
•Rents not adjusted within 90 days of a utility allowance update. If new utility
allowances cause a rent adjustment, this must be done for all affected
households, even those in mid-lease.
NON-OPTIONAL FEES NOT INCLUDED IN
GROSS RENT CALCULATION
Non-optional fees (a.k.a. mandatory fees, required fees, or condition of
occupancy fees) must be included in the gross rent calculation
Gross rent = tenant-paid rent portion + utility allowance + non-optional fees
This total sum must be at or below the applicable rent limit
Common Issues
Mandatory fees not clearly defined within the lease
Mandatory fees not listed on the TIC / included in gross rent calculation
Most common examples
Mandatory renter’s insurance
Month-to-month tenancy fees
Fees for services that are a condition of occupancy
PROHIBITED FEES
•Application fees in excess of the actual out-of-pocket expense incurred (e.g. the
cost of running a credit and criminal background check). This cannot include
fees for staff time spent reviewing applications or for completing income
verification paperwork associated with Section 42.
•Fees for preparing a unit for occupancy (e.g. redecorating fees)
•Fees for the use of items included in eligible basis
• Common examples include: swimming pools, clubhouses, parking, storage, etc.
•Rent for residential manager, security, or maintenance units if the unit is treated
as “a facility reasonably required for a project” instead of a qualified tax credit
unit.
APPLICABLE FRACTION VIOLATIONS
•Applicable fraction off based on floor space fraction. Generally in this scenario
the applicable fraction is correct based on unit fraction but is still out of
compliance because larger units were rented to market households.
•Applicable fraction incorrectly interpreted as a project rule instead of a building
by building rule.
•NOTE: Applicable fraction violations are generally detected during annual owner
certification reviews, not during tenant file audits.
TAX CREDIT & HOME COMBOS
A full discussion of the issues that arise when combining these programs is
beyond the scope of this discussion. Here are a few of the common errors found
by IHCDA staff when the programs are mixed:
•The lower limits (usually the HOME limits) must be used for the units that are
affected by both programs.
•The HOME-assisted households must be given Fair Housing and Lead-based
Paint brochures upon move-in and a signed receipt must be maintained in the
household’s file.
•The assets of HOME-assisted households must be third-party verified
regardless of whether or not the total is less than $5000.
CONTACT INFORMATION
Matt Rayburn
Compliance and Asset Manager
mrayburn@ihcda.in.gov
317-233-9564
Section 42 Compliance Staff
Jeff Ivory, Senior Compliance Auditor- jivory@ihcda.in.gov
Anika Davis, Compliance Auditor- andavis@ihcda.in.gov
George McMannis, Compliance Auditor- gmcmannis@ihcda.in.gov
Ryan Splichal, System Specialist- rysplichal@ihcda.in.gov