Kutak Rock sounds alert

Tax attorneys at Kutak Rock are alerting clients about "compliance checks" being sent out to issuers regarding tax compliance on bond-financed housing projects.

"As a result of responding to these audits and compliance checks, we can't stress enough the importance of good record-keeping and being able to locate or obtain on a timely basis, the relevant records and information have been requested," said the alert.

The compliance checks fall short of a full audit and are targeting multifamily housing communities.

"Most of the multi-family financings were compliance checks, where the IRS wasn't focusing on bond-specific issues per se, such as arbitrage or use of proceeds, but were asking for proof that multi-family bond program requirements, and in some cases LIHTC requirements, were satisfied," said the alert.

Particular areas of interest include certifying tenant income levels.
IRS form 8703, which determines whether a project continues to be a qualified residential rental project and form 8609 which is used to certify a projects eligibility for low-income housing tax credits are also being scrutinized.

The One Big Beautiful Bill Act expanded the use of LIHTCs by making a temporary 12% increase in the allocation of 9% LIHTCs permanent starting in 2026.

It also reduces the amount of private activity bond financing needed for affordable housing developers to quality for 4% tax credits from 50% to 25%.

Housing advocates maintain that dropping the percentage will increase PAB efficiency and allow projects to carry less debt resulting in more eligible projects.

Tax attorneys are re-emphasizing the need for diligent record keeping via the alert.

"Being able to produce accurate records in a timely manner not only expedites the process for completing these reviews but is also an indicator that the Housing Finance Agency takes seriously its record-keeping obligations under these programs."

"We understand this can be a practical challenge for many HFAs and can require a significant allocation of time and staff resources; however, we have seen, first-hand, the benefits of good record-keeping when responding to IRS requests."

Kutak Rock also cautions issuers that the compliance checks should be treated the same way as an audit. Responses should be sent in a timely way, "provide only the information requested," and "be very careful in any written correspondence to not inadvertently include unnecessary language."

Who will be reading the responses from the issuers raises questions as the IRS begins churning through tax season.

The agency has lost an estimated 25% of its workforce through retirements and the Trump administration's moves to shrink the federal workforce.

"The IRS is assigning Human Resources staff and other employees with little or no tax background, as well as high-paid tax specialists with no experience in taxpayer services, into front-line filing season work, like answering phones and helping process returns," said Renu Zaretsky writing for the Urban-Brookings Tax Policy Center.

During the past year tax lawyers wrestled with new agents unskilled in bond work, audits on rebates, requests for signatures on documents that were already signed, and requiring "wet signatures."