LIHTC compliance: what a tenant file review checks and what agencies find

LIHTC compliance means showing that each low-income unit in a tax credit building has a qualified household and a restricted rent. The proof is in the tenant files. State housing agencies review a random sample of those files at least once every 3 years. They report problems to the IRS on Form 8823, and noncompliance can cost the owner tax credits.

Below, we map each rule to what the file has to show and to its Form 8823 category. Then we list the problems agency reviewers keep finding, and how to review your own files before they do.

What LIHTC compliance covers

The compliance period runs for 15 taxable years, starting with the first year of the credit period, under Section 42 of the tax code. An extended use period follows, under the owner's agreement with the state agency. It generally ends no earlier than 15 years after the compliance period closes, and the agreement can set a later date. Foreclosure, or a qualified contract request where the agreement and state law allow one, can end it sooner. Even then, existing tenants keep their eviction and rent protections for 3 more years.

During the compliance period, the owner certifies to the agency at least once a year, under penalties of perjury, that the project met the rules. When the agency finds a problem, the owner gets up to 90 days to correct it. The agency can extend that to a total of 6 months for good cause. Within 45 days after that period ends, the agency files Form 8823, whether or not the problem was fixed (Treasury regulation §1.42-5). If the agency reports the owner out of compliance, the IRS writes to the owner. Its letter warns that the noncompliance may lead to recapture of credits already claimed (IRS Publication 5913).

After year 15, the extended use agreement still binds the owner. Maryland's policy for those years says noncompliance may have no tax impact then, and that the agency has more freedom to set its own rules. Maryland reviews files at least once every 5 years instead of every 3. It also warns that switching to the lighter rules too early can itself be reported on Form 8823.

The rules and what each tenant file has to show

Section 42 sets the rules, and the owner elects one of three income tests that can't be changed later. Under the 20-50 test, at least 20% of units must be rent-restricted. Those units must house households with incomes at or under 50% of area median gross income. Under the 40-60 test, at least 40% of units must be rent-restricted and house households at or under 60% of area median gross income. Under the average income test, at least 40% of units get an income limit between 20% and 80% of area median income. Those limits must average 60% or less. In New York City, both minimums are 25%.

Categories as lettered on Form 8823 (Rev. June 2023) and in IRS Publication 5913.

The rent limit uses an assumed household size for each unit. It counts 1 person for a unit without a separate bedroom and 1.5 people for each bedroom.

The LIHTC student rule

A unit doesn't count as low-income if everyone in it is a full-time student and none of them can file a joint return. A person is a student for this rule if they're in school full time during any 5 months of the calendar year. The months don't have to be in a row, and the school's own rules decide what full time means. Section 42 keeps the unit eligible in five cases.

• A student who receives assistance under Title IV of the Social Security Act, such as TANF. Federal student aid under Title IV of the Higher Education Act is a different program and doesn't qualify.
• A student who was previously in the care of a state foster care program.
• A student enrolled in a job training program that receives government assistance.
• Full-time students who are single parents living with their children. The parent can't be anyone's dependent, and the children can't be dependents of anyone but a parent.
• Full-time students who are married and file a joint return.

The IRS guide asks owners to verify student status at move-in and again each year, within 120 days before the move-in anniversary. Oregon requires this for every occupant of a tax credit unit (OHCS manual). South Carolina says student status is never grandfathered.

The next available unit rule

A household that qualified at move-in can stay in a low-income unit after its income rises, as long as the rent stays restricted. Once its income passes 140% of the current limit, the next available unit rule applies. The next comparable or smaller unit that opens in the same building must then go to a qualified household. If it goes to a new household over the limit instead, the over-income unit stops counting as low-income.

Two kinds of projects work differently. Under the average income test, the 140% is measured against 60% of area median income or the unit's own limit, whichever is higher. Deep rent skewed projects use 170%. Then any low-income unit that opens in the building, of any size, must go to a household at or under 40% of area median income. If the unit's own limit is lower, that limit applies instead.

The rule applies building by building. A household that gets smaller can also pass 140%, because a smaller household has a lower limit. Leave the over-income units out and count the building's low-income share. Once that share equals the share the credit is based on, losing the over-income units has no immediate effect.

When recertification is required

A recertification documents the household the same way as the move-in certification. Unless every unit in the project is low-income, it's due within 120 days before each anniversary of move-in. Since 2008, federal rules haven't required annual income recertification in projects where every unit is low-income, the IRS guide says.

Agencies can still ask for more. South Carolina requires its written approval before a fully low-income project stops full recertifications. Even then, it wants a full recertification at the first anniversary and a yearly recertification questionnaire after that. It allows no waiver at all under the average income test, even when every unit is low-income.

How agencies pick and review files

Treasury regulation §1.42-5 sets the schedule. The first inspection and file review must happen by the end of the second calendar year after the last building is placed in service. After that, the agency reviews files at least once every 3 years.

The number of files depends on the number of low-income units. The regulation's minimum is 12 files for a project with 20 low-income units, 21 for 100 units and 25 for 300 units. The agency picks the files at random, separately from the units it inspects. It can warn the owner that a review is coming, generally no more than 15 days ahead. It doesn't say which files it will pull. For each file, it reviews the move-in certification if the household arrived within the last year, and the latest recertification otherwise.

For your own reviews, one point in the IRS guide matters most. Problems the owner finds and fixes before the agency's notice of a review don't have to be reported. A problem that's still open when the notice arrives goes on Form 8823, even if it's fixed later.

What a LIHTC file review checks

Run these checks on every file at move-in and at each recertification, before the agency picks its sample. Most come from the IRS guide's list of what makes a file's documentation insufficient. Your agency's manual adds its own forms and rules.

• The application asks about every sourceThe application or questionnaire asks about every kind of income and asset, so the reviewer knows what to verify. A form that skips a source is a finding in itself.
• Every adult is in the fileEach adult's income and assets are disclosed and verified. Some agencies, such as NYC HPD, want a signed no-income affidavit for any adult who reports no income.
• Each source is verifiedThe IRS guide prefers verification sent straight from a third party, such as an employer. Pay stubs, W-2s and bank statements from the tenant are accepted when a third party can't be reached or is slow to answer.
• The documents are recent enoughFor a move-in certification, NYC HPD wants income documents dated within 120 days of its effective date. For a recertification, documents can be dated up to a year before it's signed. A tax return counts only until the end of the following year.
• The math is in the fileA worksheet shows how annual income was worked out. Nevada's file review training asked for the calculation done several ways, such as from year-to-date pay, from the hourly rate and from the pay stubs.
• The limit is the right oneThe income limit matches the project's income test, the county and the household's size. It's the limit in effect on the certification's effective date.
• Every adult signed and dated the certificationThe move-in date is the certification's effective date. Every adult signs on or before that date. A certification more than 120 days old by move-in has to be done again.
• Student status is verifiedIt's checked at move-in and each year, with proof for any exception the household claims.
• The lease is completeThe first term is at least 6 months, and both the tenant and the landlord signed and dated it. NYC HPD also wants the leases on file to cover the whole year under review.
• The rent is under the limitGross rent, with the utility allowance and any required fees, is at or under the limit in every month.

Agencies also differ on the details. NYC HPD wants two months of pay stubs, which is four for someone paid every two weeks. Nevada's training asked for 4 to 6 stubs in a row when there's no employer verification. California's tax credit committee asks for 3 months of stubs in a row, with an employer verification, at move-in. Oregon's compliance analysts review and approve every move-in certification before the household moves in.

Findings agencies cite again and again

Some agencies publish the problems their reviewers see over and over. NYC HPD says noncompliance often relates to missing documentation. The IRS guide's examples of out-of-compliance files point the same way.

Repeated errors can also lead the agency to review more files. The IRS guide tells agencies to consider a bigger sample when they find poor internal controls or several problems. South Carolina can take back a project's recertification waiver for repeated file problems, such as recertifications that are often overdue.

The income calculation, in brief

The tenant income certification records the household's annual income. That's the gross income the household expects to receive in the 12 months after the effective date. It includes the income of every adult and the income from assets. The IRS guide names two exceptions to watch. A live-in aide's income isn't counted. An adult full-time student who is a dependent counts at most $480 of earned income. Minors' wages don't count, but their other income does.

Income is worked out the way HUD's Section 8 program does it, not as taxable income. The IRS guide points to chapter 5 of HUD Handbook 4350.3 for the details. HUD's newer rules under the Housing Opportunity Through Modernization Act (HOTMA) changed how income and assets are calculated. The IRS hadn't issued specific HOTMA guidance for the program as of August 2026, California's tax credit committee says, and agency dates differ. Oregon applies the rules to certifications effective on or after January 1, 2025. California makes them mandatory on January 1, 2027, so check your own agency's date.

Review your own files before the agency does

Once a review is announced, fixing a file no longer keeps the problem off Form 8823. The notice is also short, generally no more than 15 days. So the review has to happen when the file is built, at move-in and at each recertification. The choice is who reads each page. Either a specialist reads every page, or software reads the pages and sends the specialist only the files that fail a check.

Our take. We'd rather a compliance specialist spend the day fixing the files that are wrong than checking the files that are already right. Software can read every page and apply the same rules to every file. The specialist should then see only the files that failed, each with the reason and the source line highlighted. The judgment calls and the signature stay with the specialist. Our guide to exception handling shows how a failed check reaches a person and gets closed.

Where Docsumo fits in a LIHTC file review

Docsumo is an intelligent document processing platform. It sorts a tenant file into its documents and reads each one. Those include pay stubs, W-2s, tax returns, benefit letters and bank statements. It also reads the application, employer letters and affidavits, and it reads handwritten text. Recertification files are read and checked the same way.

On the Enterprise plan, Docsumo checks the documents against the application and each other, by rules you set. Rules for a tenant file can work like this.

• W-2 wages are compared with the wages line on the tax return.
• Every adult on the application needs an income document or a no-income affidavit, so a missing spouse's W-2 is flagged.
• Names are matched across the application, the tax return and the affidavits.
• An adult marked as a student is flagged for a student-status certification.

Deposit rules flag bank statement deposits over an amount you set, or from sources you name, for a person to review. The amounts come from your program's rules. A calculation step can annualize income and compare the total with the limit you set. Some files arrive without a document, such as a spouse's W-2 or a full bank statement. The Document Collection and Email agents then email the applicant or the site team for it.

Values Docsumo isn't sure of go to a person, with a confidence threshold you set for each field. Clicking a field highlights the line it came from on the page. Every override is kept in the audit log, and audit logging is on the Business plan and up. Your specialist reviews and signs the certification. Docsumo doesn't certify eligibility, and it isn't a tenant-screening service, so it runs no credit, criminal or eviction checks. It supplies the software, not a review team, so your own staff handle the exceptions.

Checked data goes to your property management system through the API and webhooks. Docsumo is SOC 2 Type 2 audited and ISO 27001 certified, and the security page lists its controls. The income verification page shows how the documents in one file are checked against each other.

Which of your files would pass a review tomorrow?

Pull five files at random, as an agency picks its sample. Run the checklist above on each one and write down every gap and its cause. Write a rule for each cause. Once each new file is checked against those rules as it comes in, your specialists open only the files that fail.

Book a demo and bring a sample tenant file with the personal details blacked out, or start a free trial.

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