How to Handle Willful False Statements on Tenant Certifications
Section 1001 of Title 18 of the US Code makes it a criminal offense to make willful false statements or misrepresentations to any Department or Agency of the United States as to any matter within its jurisdiction.
Did that get your attention? The determination of “willful” is often a gray area.
- Was a long-forgotten Christmas Club account not disclosed?
- Did an applicant make an innocent mistake?
- Was a long-forgotten Christmas Club account not disclosed?
- Or was there a deliberate intention to misrepresent circumstances?
- Did a management representative try and “help” an employer by completing a Verification of Employment, requesting only a signature?
- Or was an employer signature obtained on a blank form and a manager completed with information that would qualify the household?
What Protections Exist for Owners When A Tenant Makes a False Statement?
Fortunately, there are some protections offered if management discovers reports and corrects incidences of fraud. The 8823 Guide states, “The Low-Income Housing Program will not consider there to have been reportable noncompliance if tenant fraud is discovered and addressed by the owner prior to a state agency review or an IRS audit, and the owner satisfies the state agency that:
- The tenant provided false information;
- The owner did everything a prudent person would do to avoid fraudulent tenants (due diligence) and has implemented any needed changes to avoid future problems;
- The tenant has vacated the unit (if possible); and
- There is no pattern of accepting fraudulent tenants.”
Phew. But that’s only if it’s discovered before notification of an agency review.
LIHTC Non-Compliance Arising from Resident Misrepresentation
Reading further in the 8823 Guide, “An owner’s opportunity to identify and self-correct misrepresentations or fraud by a tenant for purposes of the low-income housing credit terminates upon notification of a state agency’s intended review/inspection of the LIHC project. Any noncompliance arising from such misrepresentation or fraud discovered during a state agency’s review/inspection should be reported to the IRS on Form 8823 under the appropriate category of noncompliance, regardless of the cause. As noted in Treas. Reg. §1.42-5(a), state agencies are required to report any noncompliance of which the agency becomes aware. Agencies should report all noncompliance, without regard to whether the identified outstanding noncompliance is subsequently corrected.”
And more, ” If a state agency becomes aware of an apparent fraudulent act by the owner, management company, or other party associated with the low-income housing property, or a party responsible for providing income/asset verification for tenants, the state agency may submit Form 3949-A, Information Report Referral, with supporting documents to the IRS’ program analyst for IRC §42.2″
Spotting Signs of Fraudulent Statements from Residents/Applications
So how do you spot potential fraud, what are some of the warning signs and what can you do to protect your site from abuse? Let’s take a look at some examples from three primary qualification areas – household composition, student status, and income/assets.
Example #1: LIHTC – Applicant originally applies by herself, is found to be over income and is informed that she is not eligible for the LIHTC program. A day later, the same applicant reapplies and has added her adult nephew with no income to the application.
Example #2: Section 8 – An application was submitted for review where the household was comprised of a 19-year-old part-time college student and a baby. Documentation of custody was requested since the household would not qualify under the HUD student rule without the dependent child. Soon thereafter the applicant requested that management add the baby’s mother to the application.
Management should have a strong policy regarding changes to household composition following the rejection of an application. As illustrated above, too many times we see an applicant who (after denial) adds a family member not originally on the application, drops a roommate who earned too much income or magically becomes pregnant and now qualifies with an additional household member. By having a policy in place and applying it consistently, due diligence is demonstrated and potential non-compliance can be avoided.
Here are a few student status gems that should cause you to dig a little deeper
- The email address of an applicant has an extension of .edu
- The screening report indicates open/active student loans with no payments expected (often indicates loan is deferred)
- Screening report indicates recently disbursed student loan
- A “mistake” on the student status question on the application – originally answered YES, then crossed off and indicated NO.
- A college-age applicant with new employment in May
Student checking accounts
Make sure your site staff understands the student rules for each affordable housing program they work with. For LIHTC, “look back” at the entire calendar year when verifying status. For HUD and HOME, Part-time status matters. Clearly document any qualifying exceptions. Remind residents at certification and recertification that a change in student status must be reported to management.
Misrepresentation of income is by far the most common type of potential fraud we see. Highly trained staff, effective interviewing skills, and an additional layer of oversight all help demonstrate due diligence and protect your site against disaster. Some things to pay attention to:
Take a few extra minutes and scrutinize the credit received by an applicant, as well as inquiries made on their file. Do their monthly obligations make sense with the income they’ve reported? Do they have a mortgage loan with no disclosed real estate asset? A child support case but they’re claiming the child lives with them?
Zero Income/Unemployed status
For zero income families, full documentation of how daily needs are met is necessary. For Unemployed adults, both verification of Unemployment benefits (or lack of) and verification of termination of employment is warranted. Consider implementing the use of a No Change Form to document there have been no changes to household composition, student status or income/assets, signed at move-in.
Is the handwriting on the Verification of Employment the same as the application? ALL information “below the line” is to be completed by the employer – never an applicant, never a manager unless there is specific disclosure stating a valid reason.
Whiteout is never acceptable, whether on an application or verification. Similarly, blacking out information is also not acceptable – if corrections are needed by an applicant or verifying the source, one line drawn through the incorrect information is appropriate. The immediate reaction by a reviewer to white/blackout? What didn’t they want me to see?
Whether it’s Social Security benefit letters, YTD earnings on Verifications of Employment, child support documentation or tax returns – there is one thing certain about altered documents… they will always come back to bite you. Look at documentation critically – don’t take the risk.
Bank statements obtained for verification purposes may also reveal information about household income. Managers should pay close attention to the deposits for each month. Even if the 6-month average is in line with the income disclosed – the money is sometimes withdrawn as fast as it was deposited, rendering the average balance useless.
- Example #1: Bank statements list miscellaneous cash and check deposits which indicate an income source not previously disclosed. Deposits averaged and annualized puts annual above the income limit. In this situation, management should request clarification from the applicant of the consistent monthly deposits and obtain third party verification from the income source.
- Example #2: Checking statements reflected regular monthly deposits of $700 extra per month. Applicant clarified the source was his roommate’s half of the rent and utilities and roommate wasn’t moving in with him, so payments would stop upon move in. Management should request the prior year’s tax return and current lease to substantiate the amount as well as canceled checks to prove the source of income.
- Example #3: According to the bank statements, in addition to the $451.60 in SSA benefits, the tenant is receiving SSI of approximately $200+ per month which was not verified or included on the TIC or disclosed.
There isn’t a one-size-fits-all approach to identifying fraudulent statements. The frequency of the income will shed some light on whether it’s recurring, sporadic or even a lump sum, i.e. tax refund along with all the other deposits.
Bottom line, when it comes to performing your due diligence in any of the above scenarios – don’t accuse, inquire. Unintentional mistakes happen all the time. Telling the story is up to you. Go beyond the minimum requirement; make sure it makes sense…no auditor enjoys a mystery.