New Tax Credit Compliance Monitoring Regulations Out!

Analysis of the new rule makes it clear that a large number of tax credit properties will have many MORE units inspected by state agencies now.

On Feb. 26, 2019, the IRS is publishing the final regulation in the Federal Register adjusting the compliance monitoring rules for tax credit properties (§1.42-5). Both physical inspections and the review of documentation will be adjusted. The regulations primarily adopt the temporary regulations that were published on Feb. 25, 2016, but with significant changes.

The regulation can be read HERE.

Highlights Of Changes

Sample Size. The final regulations provide that the minimum number of units that must undergo physical and file inspection is the number of low-income units listed in the reference chart provided in the regulation (based on HUD REAC standards). The lesser of the chart or the 20% sampling no longer applies as a minimum. For projects under 102 units, this means that many more units will be inspected than was true under the 20% standard. However, for larger projects, the sampling will be less than 20%. It is around 108 units that the sample starts to dip below 20%.

A 35-unit all-tax credit project will have 16 units inspected, which is 45% of the total units, or more than double the former 7 required at the 20% minimum standard.

Same-Unit Rule. As long as the minimum sampling is met, a state agency can choose different units for the physical inspection and for the file review.

All-Building Rule. Buildings subject to HUD REAC inspections may not have all buildings inspected, per REAC procedures. However, the rule is more restrictive for buildings without REAC oversight. The requirement for non-REAC properties is now that, if the randomly selected minimum number of units to be inspected fails to include at least one unit in one or more buildings in a project, then an agency must inspecting some aspect of each omitted building. These aspects might include the building exterior, common area, HVAC system, etc. In the absence of HUD oversight, requiring that all-buildings be inspected serves as a quality control mechanism.

Notice of Inspection. The final regulations shorten the reasonable notice requirement from a 30-day to a 15-day notice that a project will experience an upcoming physical inspection or file review. The specific units to be inspected cannot be disclosed the owner/agent prior to the day of the inspection.

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