The Black Cloud of Non Compliance

Written by Harold Tucker, Spectrum Enterprises

Under Treas. Reg 1.42-5(a) state agencies are required to report any noncompliance of which the agency becomes aware. As you may know, noncompliance can be found during a file review and/or the physical inspection.

During a physical inspection state agencies are required to determine if the units and buildings are suitable for occupancy based on local health and safety codes and if the uniform physical condition standards (UPCS) have been met. Any noncompliance identified with the physical inspection must be reported to the IRS.

In addition, state agencies are required to review the low-income certifications and supporting documents for each unit selected for a physical inspection. At this point state agencies must also determine that the project is in compliance. Any noncompliance identified in the files must also be reported to the IRS.

So what is the SILVER LINING!

In chapter 3, page 3-2, of the IRS 8823 Guide it states:

“Noncompliance issues identified and corrected by the owner prior to notification of an upcoming compliance review or inspection by the state agency need NOT be reported; i.e., the owner is in compliance at the time of the state agency’s inspection and/or tenant file review.”

There it is! The IRS understands that we are human and mistakes can be made. If you do find noncompliance at your project do your due diligence to correct it in a timely fashion. DO NOT HIDE NONCOMPLIANCE! If you take immediate action to correct the mistake then the IRS does not want it reported by your state agency.

Managing an LIHTC project is a complicated endeavor and sometimes mistakes are made which lead to noncompliance. However, it is not the end of the world. Take steps to correct your issues. Talk with colleagues, us here at Spectrum and even your state agency. These can all be great resources when trying to figure out how to correct noncompliance. 


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