The Internal Revenue Service (IRS) clarified in publication of Change 4 of the HUD Handbook 4350.3 that the verification guidance in Chapter 5 of the HUD Handbook 4350.3 should be used as guidance for calculating employment income for Low-Income Housing Tax Credit (LIHTC) households. However, a state Housing Finance Agency (HFA) could be more specific in their verification requirements to meet a “standard of sufficiency.” It is up to each HFA to define the standard of sufficiency in determining and calculating income. It is also important to note that although the LIHTC and Section 8 programs use the same rules for verifying and calculating employment income for households, the Section 8 program requires verification of employment income using HUD’s Enterprise Income Verification (EIV) system, while the LIHTC program is prohibited from using EIV income information.
For this article, the focus on verifying and calculating Employment Income is for the state of Pennsylvania. LIHTC properties in other states should confirm with their HFA the requirements for verifying and calculating income for that specific state.
Most HFAs require the traditional third-party Verification of Employment (VOE) form; this includes Pennsylvania. In addition, 4-6 paystubs should also be obtained to support the VOE. There are many occasions when the VOE can be significantly different than what is reflected on the paystubs. When this occurs, an oral verification (OV) (phone call with individual who completed the VOE) should be conducted to clarify significant discrepancies.
The following procedures should be followed:
- Within 120 days of the certification date, send the VOE directly to the employer for completion. If it is returned and all the questions on the VOE have not been answered, follow up with a phone call to complete an OV obtaining the missing information. If after two (2) attempts with the employer and no response is received or if the employer refuses to complete the VOE, use the source documents (paystubs) to verify and calculate Employment Income. Document the tenant file explaining why there is no third-party and your attempts to obtain the third-party.
- The tenant or applicant needs to also provide management with 4-6 paystubs dated within 120 days of the certification date. These paystubs need to be consecutive. If paystubs cannot be provided, document the reasons in the tenant file.
- Some employers use the Work Number for employment verification. If this is the case, you do not need to pay for this information. Document the file that the employer uses the Work Number and use just the paystubs to calculate Employment Income.
- If the Work Number information is used, note that the Work Number does not provide all required information needed for calculating Employment Income. In addition to the Work Number documentation in the file, you will need to attempt to verify frequency of pay, anticipated pay increases, regular hours worked, any overtime, commissions, or bonuses. You should attempt this with an OV from the employer and if that is not successful, have the tenant or applicant provide a written statement clarifying these items. In most cases, obtaining the actual paystubs from the tenant or applicant may answer most of these items, other than anticipated pay increases.
- Once third-party and paystubs are provided, compare the information on the VOE with the paystubs and look for significant variations between the two. Look closely at hours worked per pay period, hourly rate, shift differential, bonuses, commissions, retirement accounts, and possible direct deposit. Any significant difference needs to be clarified with the employer.
- Calculate the Employment Income using the information provided on the VOE and average the paystubs to anticipate income. LIHTC rules require that the potential annual income that a person can make for the anticipated 12-month certification period is maximized. When comparing the VOE and the paystubs, use the highest calculation as the anticipated income. If an employer completes the VOE showing a range in hours or pay rate (e.g., 35-40 hours OR $10.00 to $11.00 per hour) management will use the 40 hours/week and $11.00/hour to calculate anticipated income.
It is important to understand the compliance rules for the HFA that regulates your property since each state has specific rules on verifying income for the LIHTC program. HFAs monitor compliance for the LIHTC program and report noncompliance to the IRS, so failure to document income following your HFA’s prescribed requirements could result in a non-compliance finding.
Management staff should be well trained in verifying and calculating income for LIHTC properties. M&L Compliance Management, LLC offers a variety of consulting services and training regarding the LIHTC program. Please check our website at www.mlcm.net for services and upcoming trainings and contact us to discuss how MLCM may help you meet your training or compliance needs.
“Creating and maintaining affordable housing communities is a complex task. Numerous state and federal requirements must be followed – both during development and for years thereafter. We clarify LIHTC, Federal HOME, HUD, and certification requirements you must follow to remain compliant. For more information on these services be sure to visit our Property Compliance page and don’t hesitate to contact us. The information presented in this post is intended solely for informational purposes and should not be construed as consulting advice from M&L Compliance or McKonly & Asbury, LLP.”