Tax Returns as a Verification Tool: What the 8823 Guide Advises

Written by Lainey Nadeau, Spectrum Enterprises

The 8823 guide makes numerous references to instances when a tax return can be useful in the verification process. Spectrum recommends owners obtain a copy of each applicant’s most recent tax return or proof that the applicant is not required to file.

Here are references to the 8823 guide and examples to illustrate the how obtaining a tax return can be useful.

Self Employment: The 8823 guide states, “A tax return must be filed for all self-employed individuals who operate sole-proprietorship businesses or otherwise report income on Schedule C, regardless of whether the taxpayer is reporting a profit or a loss. If the person is not eligible to get an SSN, which is needed to file a tax return, an individual taxpayer identification number (ITIN) can be obtained using IRS Form W-7,” (4-12).

Example: Julie and Wil apply for a LIHTC unit. On the application Julie says she is self employed as a hair stylist. Wil says he works at Lowe’s. The couple’s 2011 joint tax return shows Wil’s wages on line 7 (wages, salaries, tips, etc.) and his w-2 is attached.  Julie lost income in 2011 and the negative amount is listed on the on line 12 (Business income or (loss) and Schedule C. The household is eligible because the tax return and Schedule C were filed.

Example: Rosario applies for a LIHTC unit. She does not have a SSN or TIN. She works at a local restaurant as an “off the books” employee who is paid cash and does not receive a w-2 or 1099 form. She earns sufficient income to be required to file a tax return. Rosario should not be allowed to rent an LIHTC unit because she does not file taxes as required.

Households & Family Size: When determining family size for income limits, the owner must include the following individuals who are not living in the unit…Children in joint custody arrangements who are present in the household 50% or more of the time. If disputed, determine which parent claimed the children as dependents for purposes of filing a federal income tax return (4-3).”

Example: Austin applies for housing with Jessica, his 6-year old daughter. Austin’s income is over the 1- person income limit but under the 2-person income limit. Austin’s 2011 tax return shows he claimed Jessica as his dependant. According to the 8823 guide, Austin is eligible for LIHTC housing using the 2 person income limit.

Student Status: The 8823 Guide states, “A unit shall not fail to be treated as a low income unit merely because it is occupied…entirely by full-time students if such students are

I. single parents and their children and such parents are not dependents (as defined in IRC §152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of another individual and such children are not dependents (as so defined) of another individual other than a parent of such children,3 or II. married and file a joint return” (p. 17-2).

Both these exemptions can be verified by obtaining a tax return.

Example: Marie applies for housing with her daughter. Both are full time students. Marie provides a copy of her 2011 tax return showing she claims her daughter as a dependant. She meets exemption I.

Example: Bruce and Jennie apply for LIHTC housing. They are married and both are full time students at the local community college. Bruce and Jennie provide a copy of their 2011 tax return showing they filed jointly and therefore are eligible for LIHTC housing.

Tenant Misrepresentation or Fraud:  “If misrepresentation is suspected, additional steps should be taken to verify the accuracy of information provided by the tenant. See Chapter 4. Treas. Reg. §1.42- 5 gives examples of how an income certification may be documented, including the submission of federal tax returns” (p. 25-1).

Example:  At move in 2/1/11 Gloria claimed to be zero income. At recert she reports being employed at Sears. Her hire date on the EV is prior is 9/6/2010, which is prior to her move in date. The owner asks Gloria for her 2010 and 2011 tax returns. The returns show she claimed income from Sears on her 2010 and 2011 tax return. Gloria committed fraud by not reporting this income prior to move in.

Seasonal/Sporadic Income: The 8823 Guide states, “There will be situations where it will be difficult to estimate income. For example, the tenant may work sporadically or seasonally. In such cases, owners are expected to make a reasonable judgment as to how to the most reliable approach to estimating what the tenant will receive in the coming year” (p. 4-7). In these situations the most reliable approach to estimating upcoming income may be looking at previous income. This can be done by obtaining a tax return(s) and w-2 forms.

Example: Paul has been a seasonal worker for a landscaping company for 4 years. On the EV the employer says income is unknown because employment is dependent on the weather. It is currently the off season so no current pay stubs are available.  In this case the owner decides the most reliable approach to estimating upcoming income is to obtain Paul’s previous 3 years tax returns and w-2 and count the highest previous earnings.

Unemployment: The 8823 guide states, “If information is available on changes in income expected to occur during the year, use that information to determine the total anticipated income from all known sources during the year” (p. 4-9). When someone is unemployed and receiving unemployment benefits that income may not be expected to continue for the next 12 months. The 8823 guide states, “Owners are expected to make reasonable judgments regarding the most reliable method for estimating the income a household will receive during the year. If the tenant’s income cannot be determined using current information, the owner may include actual income received or earned within the 12-month period before the determination of annual income” (p. 4-9).

Example: At time of application Kristen is collecting unemployment benefits. Her unemployment benefits will run out 12 weeks after move. Kristen is currently seeking employment and anticipates earnings similar to her previous job. The owner has Kristen complete a Unemployed Affidavit where she states her anticipated earnings and obtains her previous tax return(s) and w-2(s). The highest determination of anticipated income is counted.

If an applicant claims he is not required to file a tax return this can be verified using IRS form 8821. This form authorizes an individual other than the taxpayer to receive and discuss the taxpayer’s account information. It allows the IRS to disclose information to this 3rd party.  The applicant should complete the form and specify who is being appointed as the 3rd party designee and what tax periods can be disclosed to that designee. The 8823 guide states, “If necessary, the owner can ask the potential tenant to provide a signed Form 8821, which will allow the owner to verify the information with the IRS” (4-12).

Example: Henry receives a VA pension each month. He says he is not required to complete a tax return. Recommend having Henry complete Form 8821 so the owner can verify that he is not required to file.

As demonstrated in the 8823 Guide a tax return can be a useful tool when addressing a number of eligibility concerns. For this reason Spectrum recommends owners obtain a tax return(s) for each applicant or obtain proof that the applicant is not required to file.


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