Preparing for an audit in the affordable housing industry—whether by a State Housing Finance Agency (HFA), Housing & Urban Development (HUD), the Internal Revenue Service (IRS), or another oversight body—requires precision, organization, and deep knowledge of compliance obligations. For LIHTC developers, the stakes are especially high: missing deadlines, miscalculating income or rent limits, or failing to document eligibility correctly can lead to audit findings, credit recapture, and investor concerns. This guide provides a step-by-step roadmap to help developers, asset managers, and compliance teams streamline their audit preparation, manage documentation effectively, and stay ahead of regulatory requirements across federal, state, and local programs.
Starting Off: Know the rules you’ll be tested on (set this up once)
Create a “Compliance Profile” for each property:
Regulatory baseline set up:
1) IRC 842 & Form 8609s (per building)
2) Extended Use/Land Use Restriction Agreement (LURA)/Regulatory Agreement
3) State Qualified Allocation Plan (QAP) & monitoring manual
4) Any Average Income designations
5) Minimum set-aside (20/50, 40/60, or AI bands)
6) Rent/Income Framework: Current HUD income limits, rent limits, utility allowance source & effective dates; student rule exceptions; Average Unit Rental and Vacant Unit Rental (AUR/VUR) logic
7) Record Building Inspection standard: Most HFAs follow HUD UPCS/NSPIRE physical standards and a unit/file sample (commonly ~20%+ and at least one unit per building).
Starting Off: Are there layered programs as part of the development of the building?
Ensure Layered Programs are factored into the “compliance profile” set up- HUD Section 8/HCV/PRAC, HOME, HTF, CDBG, USDA RD, local programs (municipal etc), historic credits. Be sure to incorporate any additional income/rent rules, inspections, forms required for layered programs. For example: New York City has distinct student and affordable housing requirements that differ from Federal and State guidelines.
Starting Off: Tools and Templates to Standardize
- Financial templates- Profit & Loss (P&L), Net Operating Income (NOI), Debt Service Coverage Ratio (DSCR), reserve statements (replacement/operating), distribution approvals, audited financial statements, sources & uses, equity contributions & credit delivery schedules, rent loss/bad debt
- Tenant File Index
- Eligibility Calculator
- Recertification Tracker
- AUR/VUR Log
- UA Change Log
- Rent Limit Changes Process to Implement
- Unit Status Ledger
- Work-Order Dashboard
- Audit Response Template
- Corrective Action Plan Template
- Training Manual & Template for Corrective Changes/New SOPs
- For each property mark all auditor due dates with min. 30 day alert
Starting Off: Record keeping Retention
Keep each year’s records for at least 6 years after the filing due date for that year; Year 1 records must be kept through the end of the compliance period + 6 years (effectively up to ~21 years).
Starting Off: Staff Assignments & Contact List
- Audit lead (single point of contact)
- File runners (retrieve/return files)
- Compliance SME (eligibility/rent math)
- Maintenance lead (for unit access & fixes)
- Finance lead (for tie-outs & reserves)
- Property Manager (input into shared database all property files such as income recertifications, repairs requests, unit status etc)
- Establish all of the above in each property file and ensure name, email address, phone number is up to date
Step 1: Build the audit workspace (secure data room)
Create per property and per portfolio level views/folders.
- Portfolio-level
- Org chart & GP/LP structure, contact list (owner/PM/compliance/maintenance), escalation plan
- Policies: file verification, recertification timing, LEP/Fair Housing, reasonable accommodation, data privacy/PII handling
- Global calendars: recertification windows, rent/income limit rollouts, utility allowance effective dates, audit submission dates
- Property-level (per property)
- Governing docs
- 8609s & Schedule A (all buildings), placed-in-service certificates, cost certs, carryover/allocation, extended use/LURA, loan docs, land use approvals
- Annual owner certifications to HFA (+ any state-specific forms)
- Income/rent framework
- HUD income/rent limits (all years in period), UA method & studies, effective date memos, rent calculation worksheets per unit type, AI band matrix (if applicable).
- Tenant files (organized by unit)
- Initial TIC, third-party verifications (income/assets), household composition, student status & exceptions, lease/house rules, recertification packages, changes in income/interims, AUR/VUR documentation, VAWA notices if layered, EIV (if Section 8—retain per HUD rules; not a LIHTC requirement)
- Unit status ledger
- Move-ins/outs, transfers, over-income flags, vacant-unit marketing & turnover logs, next-available-unit decisions
- Rent roll history (monthly) with LIHTC designations and actual gross rents vs max.
- Note: many of these documents and tasks are performed by the Property Management Company/Person, the role of a Developer is to ensure that these documents are regularly updated as well as provided to the Development Company for easy reference and access
Physical compliance
- Last internal inspection documents, work orders, & completion proof
- Life-safety logs, preventative maintenance schedules, , elevator/fire/sprinkler tests, pest control records, lead/asbestos/RRP records if applicable
- accessibility documentation (UFAS/504/ADA as applicable)
- Note: these documents and tasks are performed by the Property Management Company/Person, the role of a Developer is to ensure that these documents are regularly updated as well as provided to the Development Company for easy reference and access
Marketing & general public use
- Affirmative Fair Housing Marketing Plan (AFHMP) plan & updates, advertisements/outreach logs, waitlist policies and lists, fair-housing postings.
Financials
- Monthly P&L (actual vs budget), NOI, DSCR, bank recs, reserve statements (replacement/operating), distribution approvals, audited financial statements, sources & uses, equity contributions & credit delivery schedules, rent loss/bad debt, insurance, real estate tax abatements (e.g., 421a/421g/J-51 where applicable)
- Prior audits & corrective actions
- Past HFA/HUD/USDA/investor reviews, 8823 notices (if any), remediation evidence, close-out letters
Step 2 Run a pre-audit Quality Check (T-60 to T-30 days)
- Tenant file audit (target 100% for last 12 months; or at least a random sample set)
- Confirm initial eligibility was correctly determined: all income sources verified, assets calculated, household size correct, student rule vetted (exceptions documented)
- Check timeliness: initial certifications before move-in; annual recerts on time (or per state waiver rules), interims per policy
- Recalculate/confirm calculations of gross rent vs limits: include the correct utility allowance method and effective dates; verify concessions/fees don’t push gross rent over limits
- Validate AUR/VUR actions: if a household became over-income, confirm the next available unit went to a qualified household, with a dated paper trail
- Ensure files are complete, consistent, and legible
- Build an index or system to easily look up any tenant file
- Physical readiness
- Do an internal inspection to HUD UPCS/NSPIRE standards; fix life-safety items (smoke/CO detectors, GFI, egress, tripping hazards) within 24–72 hours
- Close aged work orders; document corrective actions with photos & invoices
- Financial tie-outs
- Tie rent roll to GL and to LIHTC unit designations; reconcile occupied qualified units
- Recalculate/confirm calculations of first-year credit and applicable fraction calcs if in early compliance years
- Confirm reserve funding and covenants (replacement reserve deposits, operating reserve requirements) are met
- Program layering checks (if applicable)
- HOME/HTF/CDBG: verify additional income/rent limits, property standards, and written agreements with various layered programs and their standards
- Section 8: confirm Employment Income Verification (EIV) procedures and Tenant Rental Assistance Certification System (TRACS) submissions (HUD required), Housing Assistance Payments (HAP) reconciliations, MOR results
- USDA RD: check 3560 compliance, income/rent determinations, required forms
- Local (e.g., NYC HPD): ensure HPD rent roll/eRent formats, DOCE/regulatory compliance
Step 3 Confirm Audit logistics (T-30 to T-14 days)
- Kickoff call with auditor: confirm buildings/units sample method, on-site dates, physical vs file order, any remote review windows.
- Access plan: quiet room, guest Wi-Fi, copier/scanner, read-only data room access, sign-in protocol, PII handling (no downloads without approval)
- Confidentiality: NDA if needed
- Confirm if a watermark “Audit Copy” or other specifications are required
Step 4 Audit-week execution (Day 0 to Day +2)
- Ensure Unit access: 24–48-hour notices to residents; spare keys tested; escort plan.
- Reconfirm scope & sequence; align on sample lists; request any add-ons early
- Provide indexed, complete files; when a gap is identified, log it and start the retrieval workflow.
- Have a rent/income calc explainer ready (UA source, effective dates, how fees are handled)
- If a mistake is real, acknowledge and propose corrective action before they suggest one
Step 5 Audit-week: During physical inspection
- Escort inspectors; log defects in real time with severity and location
- Remedy easy items same day (examples: replace detectors or tighten handrails) and document
- Daily close-out
- Exchange daily request lists, provide timelines, and upload documents with consistent naming
Step 6 After the audit: response
- For each finding ensure there is proper detail and documentation: description, root cause, reg citations, corrective steps, responsible party, due date, evidence link.
- Ensure corrective action is executed by the proper team members
- File fixes (get missing verifications, student affidavits), lease addenda, new UA implementation, rent credits if over-charges occurred, policy updates
- Team training on new procedures or steps to ensure issues are not repeated
- Physical repairs: confirm completion, save invoices, paid invoices and photo-document
- If any rents exceeded limits, calculate restitution and show crediting; adjust LIHTC designations if needed; update investor notice if material.
Step 7: Corrective Actions (usually due 30 days after audit)
- Submit the package by the agency’s deadline (often 30 days; sometimes extensions allowed). Include: cover letter, summary of responses, evidence index, provided in the format approved by auditor
Step 8: Preventive changes
- Update SOPs
- Add automated alerts for recerts/limits/UA
- Schedule spot-audits quarterly.
Special notes & nuances by auditor type
HFA/HSA (State agency)
- Expect file reviews + physical inspections; typical sample ≥20% of low-income units and at least one per building.
- They file Form 8823 with IRS for noncompliance or correction after the correction period—your best defense is timely, documented fixes.
IRS
- You don’t usually get a “file audit” unless escalated; your annual Form 8609-A filings and HFA’s 8823s are key
- Ensure tax return consistency (credit amount, buildings, applicable fraction) with your internal compliance records
HUD (layered Section 8/HOME/HTF/CDBG)
- For Section 8, ensure Employment Income Verification (EIV) procedures, TRACS submissions, VAWA notices, MOR results with corrective actions
- For HOME/HTF/CDBG, confirm written agreement requirements, property standards, and rent/income limit variants
USDA RD
- Verify 3560 requirements, tenant certification forms, budget approvals, and physical standards unique to RD.
Local (e.g., NYC HPD)
- Prepare HPD-specific rent rolls, compliance forms, DOCE/Regulatory Agreement adherence, and any local UA rules.
Common pitfalls for audit (and how to avoid them)
- Wrong UA or late implementation →
- Central calendar + platform alerts
- Memo or mark each changeover
- Student rule missed
- Ensure annual student affidavits
- Mark or memo site exceptions
- Late annual recerts
- Automated alerts 120/90/60/30 days out
- Create check list by team member
- AUR/VUR not followed causing over-income
- Create an over-income tracker
- Create next-available unit assignment log, ensure new tenants within limits
- Rent over limits due to fees not included in rent calculations
- Include mandatory fees in rent calculations
- Create formulas that automatically add mandatory fees when working with rent calculations
- Physical Safety Issues Found in Audit
- Instill Monthly self-inspections
- Aim for 48 hours to close critical issues
- Disorganized, missing files
- Find an organized, standard index + naming system
Final Recommendation:
If you manage 10–20+ LIHTC properties, strongly consider using Fusion SW, a purpose-built software platform that transforms how LIHTC portfolios are managed.
The platform allows LIHTC professionals to:
- Keep a centralized, organized database of documents
- Keep audit-ready document sets
- Automate recert/rent-limit/UA alerts
- Standardized reports for HFAs, HUD, investors
- Provide a real-time compliance dashboard (applicable fraction, qualified occupancy, findings, corrective action status)
- Standardized Financial statements and reports that can be run without manual manipulation
