Scenario

A state housing credit agency’s compliance manual expressly requires owners to use the agency’s standardized employment verification form. At move-in, management verifies a family member’s employment with the employer. However, instead of completing the state agency’s form, the employer provides its own written employment verification. Management uses that documentation to calculate anticipated employment income and approves the family for the LIHTC unit. During a compliance review, the agency discovers that its required employment verification form was never used.

What color is the compliance stoplight?

🟢 Green Light – Tax credits are safe
🟡 Yellow Light – Proceed with Caution
🔴 Red Light – Tax credit loss imminent

Food for thought: The employer responded, and management obtained written third-party verification. Is substitute documentation for state-required forms acceptable?

Stoplight Reveal

🟡 Yellow Light – Proceed with caution

A state agency may require standardized forms to document LIHTC compliance. The result depends on whether the state agency determines that the existing documentation is sufficient to reasonably establish the family’s eligibility.

More Details

Treas. Reg. §1.42-5 establishes the federal minimum requirements for LIHTC compliance monitoring. But the 8823 Guide also recognizes that state agencies may mandate standardized forms to document compliance with those requirements. The Guide distinguishes between imperfect documentation and insufficient documentation. If the documentation is imperfect but still allows the monitoring agency to reasonably determine that the family was eligible, the deficiency does not cause the unit to be considered out of compliance or result in reportable noncompliance.

However, the Guide also identifies missing state-required forms designed to document compliance with IRC §42 as a possible documentation problem when the agency cannot reasonably determine initial eligibility. That distinction matters here. Management obtained written verification directly from the employer, but the facts do not establish that the substitute document contains everything the state agency requires to determine eligibility.

If the agency determines that the existing documentation is sufficient to reasonably establish eligibility, the missing form may be treated as an imperfect documentation issue. If it determines that the documentation is insufficient, the deficiency may become insufficient documentation of eligibility and potentially reportable noncompliance.

That makes this a Yellow Light.

Compliance Insight

A missing state-required form is not automatically federal noncompliance, but it can become one if the agency determines the existing documentation is insufficient to establish eligibility.

References

• IRC §42(m)(1)(B)(iii)
• Treas. Reg. §1.42-5
• IRS Publication 5913 (Rev. Jan. 2024), Chapter IV, L.1 — Sufficient but Imperfect Documentation
• IRS Publication 5913 (Rev. Jan. 2024), Chapter IV, L.2 — Use of Standardized Forms
• IRS Publication 5913 (Rev. Jan. 2024), Chapter IV, N — Out of Compliance, Example 7 — Insufficient Documentation of Initial Eligibility

Did the result surprise you? Watch for next week’s Compliance Stoplight Test.