Tax Credit UPCS Inspection Updates

IRS to Update the LIHTC Inspection Requirements

The Internal Revenue Service (IRS) will post in the Feb. 25 Federal Register a change to regulations that govern the Low-Income Housing Tax Credit Compliance Monitoring. This rule is final as of February 25, 2016, and will be set to expire on February 22, 2019. These changes revise and clarify the requirement to conduct physical inspections, specifically the number of units selected.

The IRS will concurrently issue Revenue Procedure 2016-15 (https://www.us-hc.com/images/pdfs/rev-proc_16-15.pdf) to provide that the minimum number of low-income units in an LIHTC development that must undergo physical inspection is the lesser of 20 percent of the low-income units in the property, rounded up to the nearest whole number, or the sampling scale that is currently used by REAC, which set the maximum sample at 27 units (https://www.us-hc.com/the-score/issue-71.html#reac-sample). This same rule applies to determine the minimum number of units that must undergo low-income certification review (file audit). It is important to note that state agencies remain able to conduct larger samples if they choose to set a policy to inspect larger amounts of units.

The other important part of this change is that the "same unit" rule is being eliminated as part of this update to the regulations. The same unit rule stated that auditors had to conduct the file audit on the same unit that was physically inspected (or vice versa). Now, the units that are chosen for file audit and physical inspection under the UPCS inspection code can be different units within the same LIHTC project.

With these changes, LIHTC properties and the state monitoring agencies now have a lot more flexibility to conduct physical inspections at other times than the file audit and to utilize third party inspections conducted by HUD REAC as the required LIHTC compliance audit. Many states have asked us about the possibility of outsourcing UPCS unit inspections of their LIHTC properties, and the same unit rule always made such efficiencies more cumbersome. These changes do not affect how 8823's for non-compliance are issued by state monitoring agencies.

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