How to Set Up Household Files to Save Time and Avoid Tax Credit Recapture

At some tax credit sites, setting up a household file may mean randomly tossing all the paperwork concerning a household into a folder. Or household files may be organized in a way that’s understood by only one or two staffers. But practices like these can cost the owner its tax credits. When IRS or state housing agency auditors need to review your files, they could be sifting through decades’ worth of documents. If they can’t locate the documents they need, the auditors may cite you for noncompliance, which means you risk the recapture of the owner’s tax credits.

To save time and money and avoid tax credit recapture, we’ll provide some suggestions on how to organize your files in a way that’s logical and easy to understand.

How You Benefit

Well-organized household files help you on several fronts:

Find paperwork fast. If household files are well organized, staffers can find any document in a file in just a few minutes.

Score points in audits and management reviews. IRS and state housing agency auditors or inspectors may review household files to check your compliance with the tax credit law and rules—for example, the tax credit law’s record-retention rules. Well-organized files make it easy for you to show the IRS and your state housing agency that you’re complying with the rules and running a tight ship. And because auditors or inspectors can review your files easily, they can finish and get out of your office more quickly.

Save legal costs. If the site gets into a legal dispute with a household, your attorney will probably want to review the household’s file. If the file is disorganized, your attorney will end up wasting time organizing the relevant papers—at your expense. Since your staff’s time is a lot cheaper than your attorney’s, it makes sense to have your staff keep well-organized files from the start.

How to Set Up Household Files

Arrange your household files by unit number. Many sites find this the easiest way to order and locate files for current households.

To make finding documents in the files easier, divide each file into six sections. You can use an expanding folder with separate sections or a hanging file with manila folders. Label the sections:

• Agreements. Use this section for the lease, community policies, and all other written agreements between the site and the household. Easy access to these documents is important, since your attorney will need them for eviction cases.
• Certification/verification. In this section, keep all documents relating to certifications and verifications—for example, certification forms, verification forms, and copies of documents that verify information about the household. Put documents that relate to the verification of age and other facts that won’t change at the back of the section, since they must be verified only once.
• Correspondence. In this section, keep all the letters, notices, and other written communications between the site and the household. For instance, you’ll want to find late payment notices and other lease violation notices easily and quickly when you need to prepare for an eviction. Also, having the notices handy can help when you decide whether to renew a lease. And if you’re asked by another owner for a reference, this section will give you the information you need about a resident’s history at the site.
• Maintenance. In this section, file all service requests, work orders, inspection reports, and other documents concerning the physical condition of the unit while the household occupies it.
• Complaints. Use this section to file complaints from management or other residents. This way, you’ll know at a glance what types of violations the resident has committed. If you need to evict a resident, you may have enough violations to win, but it’s frustrating if you can’t locate them. And if they’re not filed properly, you may not even know they exist.
• Miscellaneous. Set up a miscellaneous section for documents that don’t fit elsewhere in the file. Without a miscellaneous section, stray papers may get filed arbitrarily in other sections—and be much more difficult to find.

When Households Move Out

When a household moves out, you should transfer the household’s file to a separate move-out file cabinet. You should organize move-out files alphabetically by the last name of the household heads, instead of the unit number, since several households may have occupied the same unit. Keep these files in separate drawers based on the year of move-out so that you can easily locate them.

These files are particularly important because if the files are lost or damaged, the owner’s tax credits are on the line. When it does an audit, the IRS will want to see the original files.

It’s especially important to securely store household files from the first year of the credit period. These files are essential in proving that your site met the minimum requirements of the tax credit program in the first year that the owner claimed credits. If you can’t prove that the site met the minimum requirements during the first year, the site won’t qualify for tax credits. Your state housing agency audits these files during the compliance period to make sure that you met this initial requirement. And the IRS may audit you up to 21 years after the first year of claiming credits.