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Month: July 2017

Know the Rules for Amending a Federal Income Tax Return

Posted on by Debra Barcuch

What should you do if you discover an error on a previously filed individual tax return? For example, you might have missed some tax-saving deductions and credits on your 2016 personal federal income tax return that you filed in February. Or you might have recently discovered that you failed to claim some legitimate tax breaks on your 2015 return that you filed last year. Here are the rules for filing an amended return.

The Basics

The first thing to know is that you should not attempt to correct the situation by filing another original return using Form 1040. That will just create confusion at the IRS and cause headaches for you. Instead, file Form 1040X, “Amended U.S. Individual Income Tax Return.”

How long do you have to file an amended return? The answer depends on whether you’re asking for a refund or you owe additional taxes.

When claiming a refund. The sooner you file an amended return, the sooner you’ll receive any refunds due. So it doesn’t pay to wait. If amending your return will produce a tax refund, the deadline for filing Form 1040X is generally the later of:

  1. Three years after the original return for the year in question was filed, or
  2. Two years after the tax for that year was paid.

Most taxpayers focus on the three-year rule. If you filed your original Form 1040 before the April 15 due date — adjusted for weekends and holidays — you’re considered to have filed the return on April 15 for purposes of the three-year rule. However, if you extended the return to October 15 — adjusted for weekends — you’re considered to have filed on the earlier of the actual due date or the October 15 extended deadline.

To illustrate, suppose you filed your 2016 tax return on March 1, 2017, and paid the tax due on that date. You now realize you should have itemized deductions instead of taking the standard deduction. Based on the three-year rule, you have until April 15, 2020, to file an amended 2016 return and claim your refund. On the other hand, if you extended your 2016 return to October 16, 2017, and then file before the extended deadline on September 1, 2017, the three-year period for filing an amended 2016 return starts running on September 1, 2017.

When additional taxes are due. This is a trickier scenario. If you discover that you understated your tax liability on the original tax return, you’re expected to file an amended return and pay the additional tax. If you don’t and the IRS discovers the error, the government will bill you for:

  1. The unpaid tax amount plus interest, which is currently at a 4% annual rate, compounded daily, and
  2. The additional failure-to-pay interest charge penalty at a 6% annual rate.

The sooner you file an amended return and pay the tax due, the sooner you’ll stop racking up interest and the failure-to-pay penalty.

You may also be assessed other penalties, depending on the nature of your underpayment — but the IRS can waive all penalties if you show you had a reasonable cause for the underpayment. For example, you might have reasonable cause if you received incorrect information from a third party, such as an inaccurate Schedule K-1 from a partnership or S corporation investment.

Although IRS audits are relatively rare these days, there is a strong chance of getting caught for omitting income that’s automatically reported to the IRS on an information return, such as Form W-2 or Form 1099.

Also, beware of the three-year statute of limitations rule: The IRS generally has three years after the date the original return was filed to discover errors and omissions and assess additional tax, interest and penalties. But a longer six-year statute of limitations rule applies if the original return understated gross income by over 25%. In addition, there’s no statute of limitations on a fraudulent return.

Bottom Line

Filing an amended return is relatively straightforward if you expect a refund — as long as you’re within the requisite two- or three-year window of opportunity. But when you’ve underpaid your taxes, filing an amended return can be a dicey situation. Always consult a tax professional first to discuss the full consequences of amending your return.

Generally, if the original return understated your tax bill by only a small amount, your tax advisor will recommend that you amend your return and pay the additional taxes, interest and penalties as soon as possible.

For larger understatements, let your tax advisor take the reins. He or she has experience in dealing with past-due taxes and may be able to get you off the hook with minimal or no penalties. But be prepared to pay at least the past-due tax plus interest. He or she can also help you file amended business returns, if needed.

Should Your Company Offer Paid Parental Leave?

Posted on by Debra Barcuch

Organizations that advocate for paid parental leave recognize that for most employers, the decision of whether to offer that benefit will be rooted in economics. In a competitive environment, it’s a rare employer that can afford to add to personnel costs without a bottom line-based rationale.

The motivation of employers in California, New Jersey, Rhode Island, New York and the District of Colombia, includes obeying state law. However, in some of those states, the compensation employees receive while on leave may be less than the full amount of their earnings, and is funded by a state-run insurance system that employees fund via mandatory payroll-deducted premiums.

What’s the outlook for paid parental leave? Based on a recent survey by the Society for Human Resource Management (SHRM), dealing with employer-paid family leave practices, growth appears to be on the horizon. SHRM’s analysis includes this prediction: “A competitive labor market may prompt more organizations to adopt robust, paid parental-leave policies in order to attract needed workers.”

Industry Variation

SHRM’s research shows that 18% of U.S. employers offer paid maternity leave, and 12% also offer paid paternity leave. Paid parental leave is most common in the technology sector, where competition for talent is intense. 

Research by WorldatWork, another professional membership group, delved into the same topic in 2016. Assessing the prevalence of paid parental leave policies is tricky because companies often don’t distinguish between paid family leave benefits, and paid leave earmarked specifically for new parents. Below are some of the findings.

Among companies that do offer paid leave to new parents as a separate benefit from their overall paid family leave policy:

  • More than half limit the time period to six weeks or less,
  • More than one-third make employees eligible to receive it immediately upon being hired,
  • Less than half have a one-year waiting period, and
  • The largest segment, about one half, requires new parents to use the benefit within the first year of parenthood, while just over one-third have a six-month deadline.

Potential Benefits

According to a report compiled by the National Partnership for Women and Families, employers that offer paid leave plans may enjoy many benefits as a result, some of which are listed below.

Paid leave:

  • Improves worker retention, reducing turnover costs. First-time mothers who take paid leave are more likely to return to the same employer than to an employer who doesn’t offer paid leave,
  •  Increases worker productivity, according to survey data from California employers, where paid family leave is mandatory,
  •  Boosts employee loyalty and morale,
  •  Helps put smaller employers in a position to compete with larger employers, and
  •  Heightens competitiveness in the global economy for American businesses. (Most industrialized countries mandate paid family leave.)

These claims are general, so assessing the potential benefits of having a paid leave plan in your workplace will require some analysis on your own part. Here are some questions suggested by SHRM to help with such an evaluation.

1. Which job categories or demographic segments of your workforce are most vital to your success? For example, you may find that the group you most rely on is composed of younger employees who are more likely to need paid parental leave.

2. What motivates the workers who are most vital to your success? It’s possible that the employees who are most likely to take advantage of paid parental leave would place a higher value on some other form of compensation, such as more generous paid vacations.

3. What’s the competitive landscape in your labor market? If you’re not having a turnover problem or if your competitors aren’t offering paid family leave, you may not feel compelled to consider it.

4. What’s your overall employment strategy and workplace culture? If your primary employment value proposition is, for example, schedule and career flexibility and a “family friendly” culture, paid family leave would be a natural fit.

5. Crunch the numbers. While it’s impossible to project with precision the cost in “extra” wages and financial payoff that’s involved in reduced employee turnover and higher productivity levels, you’ll need to give it a shot. If you move forward with a paid family leave policy, after you have accumulated some history, you will be able to verify or correct the preliminary conclusions you have drawn.

Going Forward

Will paid maternity and related family leave benefits become more commonplace, as often predicted? The answer will depend on the conclusions employers draw as they consider these and other questions and factors beyond their control, including the future strength of the economy and birth rate trends.

Appeals Court: Commissions Can Be Apportioned Back Over Time

Posted on by Debra Barcuch

Sometimes it’s clear when an employee is entitled to overtime pay, and how much, and other times it isn’t.The issue can become especially tricky when employees are paid at least partially in commissions. In a recent case, a federal appellate court remanded back to a lower district court its ruling on the allocation of commissions in determining overtime pay. The appeals court said the lower court didn’t properly interpret federal overtime law. (Freixa v. Prestige Cruise Services, LLC, CA-11, No. 16-13745, 4/14/17).

Key Facts of the Case

The District Court for the Southern District of Florida had ruled that a cruise ship employee who received commissions was ineligible for overtime pay. As a sales representative, the employee sold cruise trips to customers. He received a fixed salary of $500 a week plus commissions. During the one year he was with the company, he earned over $70,000 in compensation. Of this amount, 63% was paid in commissions.

The commissions were calculated monthly and paid the following month. Both parties agreed in court that the sales rep worked an average of 60 hours a week during his employment, but they disagreed about the number of hours he worked in any individual week.

Subsequently, the employee sued the cruise ship line for overtime pay. He argued that the compensation he received in certain weeks fell below the required threshold for the exemption from overtime that applies to retail workers who are paid commissions.

Lower Court’s Rationale

The district court acknowledged that the law generally requires a calculation of the regular rate of pay on a week-to-week basis. But the court found it difficult to determine the exact weeks during which the sales representative earned commissions.

As a result, it decided to divide his entire remuneration for the year across every hour in every week he worked — assuming 60 hours of work a week — to arrive at an average hourly rate of $23.45. Because that rate exceeded the exemption threshold of $10.88 per hour, the district court awarded summary judgment in favor of the cruise ship company.

In reaching this decision, the district court said it believed its calculation conformed with federal regulations that allow for a different “reasonable and equitable method” to calculate the regular rate of pay “if it is not possible or practicable to allocate the commission among the workweeks of the period in proportion to the amount of commission actually earned or reasonably presumed to be earned each week” (29 CFR 778.120).

Appeals Court’s Rationale

But that wasn’t the end of the story. After the sales representative appealed, the Eleventh Circuit Court overturned the lower court’s ruling, saying that the district court had misinterpreted the federal regulations.

The appeals court ruled that when commissions are computed monthly, those earned in one month might not be allocated across weeks worked in other months. Instead, federal regulations limit the district court to allocating commissions across weeks within the time period in which they were earned. The appeals court cited a related regulation that required as a general rule, “that the commission be apportioned back over the workweeks of the period during which it was earned” (29 CFR 778.119).

Based on the context of this and other regulations, the appeals court said it’s clear that the term “period” means “computation period.” For the sales representative in this case, it refers to each month of his employment, not the entire year that he worked. For example, the court said it believed that the district court could allocate commissions earned in January across weeks worked in January, but not across weeks worked from February through December.

We haven’t heard the last word on this matter. The case was remanded back to the district court for further proceedings.

What the Upper Court Cited

The regulation cited by the appeals court says that if calculation and payment can’t be completed until after the regular pay day, the employer may disregard the commission in computing the regular hourly rate until the amount of commission can be determined. Until then, the employer may pay overtime at a rate not less than one and one-half times the hourly rate paid the employee, excluding the commission.

Then, when the commission can be determined, the employer must pay any additional overtime compensation due once the commission is included. To compute the additional overtime, “it is necessary, as a general rule, that the commission be apportioned back over the workweeks of the period during which it was earned.”

The additional compensation must be not less than one-half of the increase in the hourly rate of pay attributable to the commission for that week in question multiplied by the number of overtime hours worked.

Key point: In accordance with the the Fair Labor Standards Act of 1938, an exemption to the usual overtime pay requirements exists for employees who work for a retail or service establishment if two requirements are met:

  1. The regular rate of pay exceeds one and one-half times the minimum hourly rate (that is, $10.88 an hour), and
  2. More than half of the compensation for a reasonable period (but not less than one month) represents commissions paid on goods and services. This calculation of overtime pay under this exemption was at the core of the above case.

Avoid Rapid Decisions

The rules in this area are complex and may be open to interpretation. Don’t make any quick assumptions about your company’s responsibilities without consulting with your professional payroll advisors.

Consider Taxes before Converting Your Home to a Rental Property

Posted on by Debra Barcuch

Have you ever thought about becoming a landlord? This option may be tempting if your local real estate market is surging and rental rates are strong, especially if you’re already planning to relocate or downsize to a smaller home.

Ideally, you’ll be able to shelter most or all of the rental income with tax deductions and eventually sell the property for a higher price than you originally paid. In the meantime, however, it’s important to understand the confusing tax rules that apply when a personal residence is converted into a rental.

Special Basis Rule

Once you become a landlord, you can depreciate the tax basis of the building part of a residential rental property (not the basis of the land) over 27.5 years. In plain English, this means you can deduct from your taxable income a portion of the building’s value every year for the next 27.5 years. However, a special basis rule applies to a rental property that was formerly a personal residence.

Under the special rule, the initial tax basis of the building portion of the property for purposes of calculating your postconversion depreciation write-offs equals the lower of:

  • The building’s fair market value (FMV) on the conversion date, or
  • The building’s regular basis on the conversion date.

Regular basis usually equals original cost plus the cost of any improvements (excluding any normal repairs and maintenance).

When You Sell

The rules become really confusing when you sell the property. To determine if you have a deductible loss, a similar special basis rule applies. That is, you must use the lower of:

  • The property’s FMV on the conversion date, or
  • The property’s regular basis on the conversion date.

Additionally, you must reduce the initial basis by depreciation deductions taken during the rental period. The special basis rule and the depreciation deductions greatly reduce the odds of having a deductible loss on a sale, especially when property values are below historical levels. With property values recovering in many areas, however, the chances of reporting a taxable gain have increased.

Your tax basis for purposes of calculating whether you have a taxable gain on a sale is simply the property’s regular basis on the sale date. Regular basis generally equals the original cost of the land and building, plus the cost of any improvements minus depreciation deductions claimed during the rental period.

Sellers in Limbo

When a converted property is sold, you must use the special basis rule to determine if you have a deductible loss on the sale, but you must use the regular basis rule to determine if you have a taxable gain. Following two different basis rules can sometimes cause sellers to have neither a taxable gain nor a deductible loss. This happens whenever the sale price falls between the two basis numbers.

Confused? Here are some examples of how to calculate gains and loss to help clarify.

Example 1: No tax gain or loss on sale

To illustrate how this works, suppose you convert your home to a rental while the market is recovering — but it hasn’t returned to its previous peak by the time you sell. Here’s how the numbers might shake out:

Regular basis on conversion date $300,000
Postconversion depreciation deductions ($13,000)
Regular basis for tax gain $287,000
FMV on conversion date $235,000
Postconversion depreciation deductions ($13,000)
Special basis for tax loss $222,000

If the net sale price is between $222,000 and $287,000, you have no tax gain or loss, because the sale price falls between the two basis numbers.

Example 2: Modest gain on sale

Alternatively, suppose you convert a property in a market that’s still in the early stages of recovery, and you intend to hang onto it for a while before selling.

Regular basis on conversion date $300,000
Postconversion depreciation deductions ($32,000)
Regular basis for tax gain $268,000
FMV on conversion date $285,000
Postconversion depreciation deductions ($32,000)
Special basis for tax loss $253,000

If the net sales price is above $268,000, you have a taxable gain. For example, with a net sale price of $345,000, you must report a taxable gain of $77,000 ($345,000 – $268,000). That is because, in this example, the postconversion depreciation deductions reduced the regular basis and the value of the property jumped. As a result, the sale price exceeds the regular basis, which produces a modest taxable gain on the sale.

Example 3: Big gain on sale

Now, let’s suppose you convert a property in a strong market. You’ve owned it for years and its FMV never fell below what you paid for it. In this case, the special basis rule for determining if you have a tax loss does not apply.

Regular basis on conversion date $235,000
Postconversion depreciation deductions ($26,000)
Regular basis for tax gain $209,000
FMV on conversion date $285,000

Assuming the property is sold for $360,000, your taxable gain would be a whopping $151,000 ($360,000 – $209,000). In this example, the postconversion depreciation deductions reduced the property’s basis and the value jumped after the conversion. So the sales price substantially exceeds the basis, generating a significant taxable gain on the sale.

Principal Residence Gain Exclusion

Fortunately, some landlords may be able to shelter their gain on the sale of a recently converted property with the principal residence gain exclusion. When allowed, the gain exclusion really helps: Unmarried property owners can potentially exclude gains of up to $250,000, and married joint-filing couples can potentially exclude up to $500,000.

Important note: If you qualify for the gain exclusion, you can’t use it to shelter the part of a gain that’s attributable to depreciation deductions. In the previous example, if the gain exclusion applied, the taxpayer must still report a taxable gain of $26,000, which equals the amount of the postconversion depreciation deductions. But that’s much less than the total gain of $151,000.

To qualify for this exclusion, the tax rules require that you use the property as your principal residence for at least two years during the five-year period ending on the sale date. So, it’s impossible to meet the two-year usage requirement once you’ve rented the property for more than three years during that five-year period.

So, this tax break is allowed only if you’ve rented the property for no more than three years after the conversion date at the time you sell.

Ready to Convert?

Home-to-rental conversions can be a lucrative financial proposition for some property owners. But the tax rules can be confusing. To help understand the rules and evaluate whether you should become a landlord, contact your tax advisor. He or she can help decide what’s best for your situation. Beyond taxes, your tax pro will help you factor other considerations into your decision.

Sharing Tax Issues in the Sharing Economy

Posted on by Debra Barcuch

Do you provide car rides through a mobile app, rent out your spare room using an online platform or repair computers for local businesses on demand? If so, you may be considered part of the “sharing economy” (also known as the Gig or on-demand economy).

Participation in this emerging method of distributing services can be a good way to earn money in your down time, pursue a more flexible lifestyle and provide cash to offset the expenses associated with owning a vehicle or a home. The IRS recently offered some guidance for this rising trend. Here’s a summary of the key points.

Employee vs. Independent Contractor

First and foremost, there’s no free tax ride. Uncle Sam wants his cut of your earnings from any sharing economy activity — and your state tax agency may be eyeing it, too. The good news is that some of your tax liability could be offset by deductible business expenses.

When providing on-demand services, you’ll generally be classified as an independent contractor, rather than an employee. Certain exceptions apply — for example, if you’re a corporate officer of the firm providing the service.

Employees receive W-2 forms from their employers. But contractors will usually receive 1099 forms for participating in the sharing economy jobs, which must be reported on Schedule C on the individual’s federal tax return. The type of 1099 form depends on the volume of your activities. The company will issue:

  • Form 1099-MISC if you only occasionally provide services, or
  • Form 1099-K if you had more than 200 transactions and received at least $20,000 in payments for the year.

Instead of having taxes regularly withheld from their paychecks, self-employed contractors must make quarterly estimated tax payments to the IRS. Otherwise, they could be assessed tax penalties and interest on the amounts that weren’t paid, as well as any regular tax that’s owed. These adverse consequences could happen even if a contractor is ultimately entitled to a tax refund at the end of the year.

Taxes are a “pay-as-you-go” proposition. Self-employed taxpayers often rely on estimated tax payments to pay both their income tax liability and self-employment tax (the equivalent of FICA tax for employees). Payments must be made quarterly according to the IRS schedule:

  • First estimated payment is due on April 15,
  • Second estimated payment is due on June 15,
  • Third estimated payment is due on September 15, and
  • Fourth estimated payment is due on January 15 of the following tax year.

These deadlines move to the next business day if the due date falls on a weekend or a holiday. For example, the estimated payment for the fourth quarter of 2017 is due on Tuesday, January 16, 2018, because Monday, January 15, 2018, is Martin Luther King Day.

Some taxpayers participating in the sharing economy may have another option: The requisite amount of tax can be paid through any combination of estimated tax payments and regular income tax withholding. Therefore, if you’re employed at another job, you could increase your withholding to compensate for the extra tax you’ll owe from your sharing economy job. Simply fill out a revised Form W-4 and submit it to your employer. Your tax advisor can help you figure out the right amount of incremental withholdings.

Deductible Expenses

Depending on your circumstances, you may be able to claim deductions for expenses incurred to provide on-demand services. What costs qualify? In general, a business expense must be “ordinary and necessary” or the IRS won’t allow you to deduct it. Consider the following examples.

Drivers. Typically, the biggest expense for drivers on Uber, Lyft and other ride-sharing apps is vehicle depreciation. Subject to the annual limits for luxury cars, you may be able to write off at least some of the vehicle’s cost over time, based on the percentage of business use. In addition, you may deduct other operating expenses, such as gas, oil, insurance, car washes and repairs.

There’s a simplified alternative to keeping detailed records that are required for deducting actual expenses (including depreciation): You may use the IRS flat rate of 53.5 cents per business mile in 2017. Under this alternative, you can also deduct related tolls and parking fees.

Landlords. If you will take an extended vacation this year, have an unused spare room or own a second home, you might rent the unoccupied property to a tenant through an online platform, such as Airbnb, HomeAway or VRBO.

Deductions for rentals are limited to the amount of rental income if your personal use of the residence exceeds the greater of 14 days or 10% of the time the place is rented out. But, if you rent out a place for 14 days or less, there are no tax consequences: You don’t have to report the income, but you can’t claim deductions either.

When renting out property, beware of the rules for hotels and bed-and-breakfast properties. If you provide substantial services primarily for the guest’s convenience, such as regular cleaning, changing linen or maid service, you may be classified as running a hotel business. This classification could increase your tax liability, but your tax pro may have suggestions to avoid that pitfall. For example, you might consider charging a separate cleaning fee at the end of the rental, rather than providing complementary daily maid service.

Office space. To save overhead expenses, some small business owners opt to share office space, especially in high-priced business districts, through sharing platforms like WeWork. Essentially, the company rents out space in an office building and finds tenants to sublet smaller units. Each tenant maintains a desk, a computer and other essentials. But tenants collectively share common amenities, including a kitchen, lobby and general receptionist. As an added benefit, professionals who share office space can network with other like-minded professionals, which may lead to joint ventures and other forms of collaboration and revenue-sharing.

For tax purposes, you can deduct 100% of your shared office expenses. This option may be easier and subject to fewer limitations than home office deductions.

Professionals. The sharing economy isn’t just for people who own hard assets, such as vehicles or real estate, or who perform manual labor, such as the services of a housekeeper or handyman. Increasingly, professionals — including attorneys, physicians and computer programmers — are participating in the Gig.

A major expense for these professionals is the vehicle used to travel to and from freelance assignments. Additionally, they may be able to deduct at least some of the costs of electronic devices — such as tablets and smartphones — based on the percentage of business use.

Bottom Line

The tax rules that govern sharing economy activities are still evolving. Contact your tax pro for additional guidance. Although the standard principles for self-employed individuals generally apply to people with sharing economy jobs, there are some exceptions and subtle nuances. Your advisor can help ensure that you’re in compliance with the latest rules.

MOR Questions Your Audit May Not Catch

Posted on by Debra Barcuch

Although a regular audit of financial statements and disclosures can help property managers prepare for a HUD-sanctioned management and operating review (MOR), there are some differences between HUD Audit Guidelines and the questions covered in a management review through HUD 9834.

There are rather obvious differences on HUD 9834, like lead-based paint compliance, vacancy monitoring, or receipts — by unit — of appliance purchases. Those questions aren’t included in HUD audit guidelines. However, items like documentation of outside contractors and the reconciliation of accounts payable seem like they should be similar for an audit or MOR. They aren’t exactly.

We have highlighted a few of the grey areas here that property managers of HUD-funded properties should be aware of when reviewing HUD 9834. Did your recent audit cover all the obvious and not so obvious questions you may be asked during an on-site review, or do you have some work to do?

1. Condition of the Property

  • Lead-based paint compliance – inspection, maintenance, abatement and protection of tenants and their belongings?
  • Repairs – paid consistently from right operating expense account and eligible items reimbursed by reserve?
  • Tools – satisfactory inventory system to account for them (and keys?)
  • Appliances – secured to prevent theft?
  • Maintenance backlogs – backlog of work orders?
  • Unit Readiness – assess occupancy readiness of vacant units?
  • Signage – clear and adequate for tenants and visitors?

2. Financial Health

  • Project operating costs – reasonable compared to a similar property?
  • Principals and Board – received HUD 2530 approval and meet regularly?
  • Mortgage – any past restructuring?
  • Owner – eligible for incentives?
  • Reserve and General Operating accounts – adequate to meet future needs?
  • Operating expenses – regularly reviewed to make sure property is paying best possible rates, including taxes and utilities?
  • Bad debts – procedure for write-offs reasonable?
  • Centralized accounting – approved by HUD?

3. Rent Increases

  • Requests – submitted promptly to HUD?
  • Reserve for Replacement analysis – performed before submitting budget-based rent increase?
  • Rent adjustments – documented last adjustments?
  • Special rent increases – previously approved?

4. Vacacy Rates

  • Vacancy activity – documented for the last 12 months and how many each month?
  • Rates – vacancy rates on the date of the MOR on-site visit?

5. Staffing

  • Vacancy – staffing issues impacting vacancy rates?
  • Vendors – maintain a list of outside contractors and bills paid in time to maximize discounts?
  • Enterprise Income Verification (EIV) – proper controls with regard to staffing access to sensitive tenant data in the EIV system?
  • Management – can staff adequately perform management and maintenance functions, and do they receive regular training?
  • After Hours – after hours and emergency phone numbers posted?
  • Supervision – process for field supervision of staff?
  • Tenant employment – efforts to employ tenants under Section 3?

6.  Tenants

  • Sex offender status – does application ask if applicant or any member of applicant’s household is subject to a lifetime of state sex offender registration?
  • Previous residence – does application ask about list of previous residences?
  • HUD 92006 – attached to application?
  • Application denial – different appeals reviewer than the person who denies the application?
  • Wait list – number of applicants listed for each type of unit?
  • Fees and charges – other charges assessed besides security deposits?
  • Tenant Rental Assistance Certification System (TRACS) – data secure and up to date?
  • Private information – tenant personal information stored according to HUD document retention guidelines and access limited to only certain personnel?
  • Unit size – unit sizes adequate for household composition?
  • Eligibility exceptions – exceptions granted to ineligible households?
  • Pets – pet deposits in acceptable range and payments allowed?
  • EIV – income discrepancies documented and resolved?
  • Utilities – certifications reflecting the correct utility allowances, and  reimbursements distributed within five days of receipt of housing assistance payments?
  • Intent to Vacate – notices received in writing?
  • Rejections – rejection letters inform applicants of the right to appeal and appeals documented and handled properly?

By paying attention to these particular questions at your properties — in addition to conducting a regular HUD audit — your ability to answer questions during a MOR desk review or on-site review will be stronger. For additional questions or concerns, talk to the Audit team at Cornwell Jackson.

Download a copy of the HUD 9834 or view the source list on the whitepaper for additional HUD forms and guides.

Download the whitepaper: Are You Ready for MOR? Affordable Housing Audit Tips to Meet HUD Standards

Scott Bates, CPA, is a partner in Cornwell Jackson’s audit practice. He provides consulting to clients in real estate, including HUD-funded properties. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Take Care to Meet Terms of Contracts at Risk of Default

Posted on by Debra Barcuch

It is one thing to disagree about certain aspects of a construction project. It’s quite another when disagreements justify the termination of a contract due to default.

Prime example: In a recent case, a contractor doing work at a federal government facility faced termination for default where he repeatedly insisted on changing designs, failed to submit required documents and didn’t submit a safety plan. (Appeals of Industrial Consultants, Inc. d/b/a W. Fortune & Co., ASBCA No. 59622, 3/10/17)

Background

When construction projects end up in legal disputes, the terms of the contract generally control the outcome. And sometimes a breach of the contract results in a termination due to default.

Of course, not every breach is a deal-breaker. Only a material breach warrants termination. Courts have characterized a material breach as a substantial failure to perform or a violation of terms that is substantial enough to invalidate a contract’s intent. Essentially, a material breach is so fundamental to the terms of the contract that it defeats its main purpose.

One instance that can result in termination is a failure to follow design documents. In a classic case, the Appellate Court of Connecticut held that the construction of a kidney-shaped pool was a substantial deviation from the peanut-shape listed in the contract and that it constituted a material breach. The pool contractor’s refusal to comply with the contract’s specifications justified termination. (Strouth v. Pools By Murphy & Sons, Inc., 829 A.2d 102, 8/26/03)

Another basis for contract termination is a delay in completing the work by the date specified in the contract or where circumstances make timeliness critical. In some cases, a combination of failure to follow design and lack of timeliness can combine for a justified termination.

Facts of the Recent Case

A federal research and engineering facility in Hanover, NH, put out a contract to upgrade its heating, ventilation and air conditioning (HVAC) equipment. Although the scope of work was limited by budget constraints, the job was designed to include replacement of the air handling and condensing units, the variable air volume terminal units and the existing louvers, as well as ductwork modifications.

Prospective bidders were “urged and expected” to attend a pre-bid site visit conducted by the U.S. Army Corps of Engineers and told the work would have to meet certain Army Corps specifications. The contractor in question declined to visit the site before making the bid. The firm’s bid price was the lowest bid by a 35% margin.

The parties entered into a contract that allowed more than a year to complete the work. Work on site could only be performed on no more than four consecutive weekends after electrical work was completed by a third party. And that work couldn’t be finished until two months before the contract’s specified completion date.

Safety Plan and Product Data

One of the contract issues relating to the dispute was a standard government requirement that the contractor had to submit for approval by the contracting officer 1) an accident prevention plan and 2) product data for the air handling unit and other equipment.

The contractor visited the site for the first time a little over a month before work was scheduled for completion. After this walk-through, the contractor concluded that the government’s design had significant defects. He then began a campaign to redesign the work, which he refused to drop even though the Army Corps repeatedly told him to build as designed.

In the course of this process, the contractor submitted numerous Requests for Information to which the government promptly responded. Subsequently, the contractor either delayed in providing government-requested submittals or never provided requested submittals at all.

“Lack of Response”

Eventually, the officer in charge of the work sent three notices to the contractor, demanding that deficiencies be fixed. Numerous communications went back and forth between the parties. According to the officer in charge, the contractor was accusatory, combative and unwilling to cooperate. Two days after the scheduled completion date, the officer in charge issued a termination for default, citing the firm’s “lack of response regarding (the) request for required submittals, and to complete the contract as written.”

The outcome: The case went to an administrative judge for the Armed Services Board, who ruled that the contractor failed to:

  • Complete the work in a timely fashion,
  • Proceed with the work after the Amy Corps rejected its proposed changes to the project,
  • Furnish some of the requested submittals, and
  • Gain approval of other submittals.

Because the contractor was unable to demonstrate that the defaults were excusable, termination for default was granted.

Stick to Basics

Although you may have some leeway on construction projects, you must adhere to the basic contract. If it states that you must build in a certain way, follow the specified design or run the risk that your firm will be terminated for default.

4 Tips on Government Bids

When work in the private sector slows, you might be able to tap into another source of revenue: federal and local government authorities.

But winning a government bid is hardly a slam dunk, and your firm may find the process to be tedious and sometimes overwhelming. Here are four basic tips to help you get started.

  1. Start small and end big. Most government agencies place a value on past success. Win a few small contracts and then you can move on to a bigger piece. Once you get your foot in the door, keep it there until you’re ready for the next step.
  2. Do the legwork. Fortunately, you can find most of the resources you need online. First, sign up with the Central Contractor Registration (CCR) database, creating a profile so government procurement officers can find you. Then sign up for the pre-approved bidder list for the General Services Administration (GSA).
  3. Keep your nose to the grindstone. This is a marathon, not a sprint. It may take a couple of years or even longer to win your first bid. Those who throw in the towel early aren’t around to finish the race.
  4. Foster relationships. As it is in the private sector, developing relationships with government procurement officers is essential to continued business. In addition, partnering with other entities may lead to future payoffs.

 

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