PART 4: WHAT TO DO IF YOU’VE BEEN DUPED BY FAKE PAY STUBS

In previous articles, we talked about fake pay stubs, how to detect them, and how to prevent being duped.  But what if some slipped by you - now what do you do?

IRS Position on Fraud

The IRS takes a strong position relative to fraud at LIHTC communities.  The 8823 Audit Guide 25-2 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:

(1) the tenant provided false information;

(2) 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;

(3) the tenant has vacated the unit (if possible); and

(4) there is no pattern of accepting fraudulent tenants. In such cases, the owner need not reduce the applicable fraction for determining the credit amount and the state agency need not report the noncompliance arising because of the tenant’s fraud on Form 8823.

Self-Discover and Self Correct

When it becomes apparent fake stubs slipped through, you must act and act swiftly.  The IRS tells us the owner must correct non-compliance within a reasonable period after discovery or when non-compliance reasonably should have been discovered.   Additionally, the 8823 Audit Guide 3-2 states:

Noncompliance issues identified and corrected by the owner prior to notification of an upcoming compliance review or inspection by the state agency need not be reported; i.e., the owner is in compliance at the time of the state agency’s inspection and/or tenant file review.

Let’s say are working on a LIHTC first year recertification and notice the stub format is totally different this year even though they work for the same employer as last year.  You investigate further and self-discovered the fakes.  It is now your duty to correct.  When you self-discover and self-correct non-compliance before the state agency sends a notice of audit, it is not reportable to the IRS.

Self-Correcting is Not Always Easy

So…fix it.  Sounds easy, right?  Sometimes, but not always.  Confronting a resident who would not have qualified at move in, for example, can be extremely sensitive.  We recommend this be handled only by those knowledgeable of the lease and addenda and who are comfortable doing so.  Written notices should be approved by your compliance support and/or legal department before sending.  Be sure you have adequate back up documentation to prove your case.  Be firm and consistent with your actions.  To correct this for LIHTC purposes, the unit should be re-occupied by a qualified household.

Have you encountered fake pay stubs?  We are looking to share experiences on how you discovered fake stubs and the outcome.  So let me know!