HUD and LIHTC Projects: Audit Risks Hidden in Everyday Compliance

Most U.S. Department of Housing and Urban Development (HUD) and Low-Income Housing Tax Credit (LIHTC) audit findings for affordable housing projects don’t originate from a single major error. More often, projects appear compliant on the surface, but inconsistent application of requirements or inadequate documentation creates risk when files are reviewed by auditors, state agencies, or HUD.

Findings generally result from one or more of three root causes:

• The requirement was misunderstood
• The requirement was applied inconsistently
• The conclusion wasn’t adequately documented

Layered affordable housing funding creates layered compliance requirements

Many affordable housing projects combine LIHTC with HUD programs, HOME funds, Housing Trust Fund (HTF) resources, tax-exempt bonds, state funding, lender requirements, and partnership agreements.

One of the most common mistakes is assuming compliance with one funding source automatically satisfies another. Files should clearly document which requirements apply and how compliance was achieved.

Common HUD and LIHTC audit findings

Asset and income calculations

Relevant guidance: IRC §42(g), Treasury Regulation §1.42-5, HUD Handbook 4350.3 Chapter 5.

• Amounts aren’t consistent across the TICs/HUD-50059, third-party verifications, and supporting documentation
• Current rent and income limits aren’t applied consistently
• Files don’t clearly show how reported income, assets, or rent calculations were derived

Example: The file contains all required documents, but there’s no clear explanation showing how annual income was projected or how asset income was calculated.

Audit perspective: Could an independent reviewer recalculate the amount using only the documentation in the file?

HUD and LIHTC rules

• HUD and LIHTC requirements are often treated as if they are identical
• Files don’t clearly identify which program requirements govern key calculations and compliance decisions

Example: Team follows HUD verification procedures but doesn’t document whether the same requirements apply to the LIHTC determination.

Audit perspective: Can an independent reviewer determine which program requirements were applied and why, based solely on the documentation in the file?

Explore more: The impact of HOTMA on affordable housing projects using HUD and LIHTC

Financial reporting and compliance

• Recorded revenue doesn’t consistently tie to approved HUD contract rents, subsidy agreements, tenant rent calculations, or LIHTC rent limits
• The timing of rent changes, certifications, or subsidy approvals isn’t reflected accurately in recorded revenue
• Reserve deposits and withdrawals don’t consistently follow regulatory agreements, partnership agreements, or required approval provisions

Example: The rent roll reflects updated rent limits, but the property management system wasn’t updated timely.

Audit perspective: Is it clear how amounts reported in the financial statements are supported by tenant records, compliance files, and governing agreements?

Development costs and cost certifications

• Costs included in HUD or LIHTC cost certifications aren’t clearly reconciled to the general ledger, construction draws, or development cost reports
• Adjustments made during the cost certification process aren’t clearly supported
• The basis for excluding costs from eligible basis or including costs in certified amounts isn’t clearly supported

Example: Total costs reported in the cost certification agree to the development cost report but can’t be reconciled to the general ledger because reconciling adjustments aren’t documented or supported.

Audit perspective: Can an independent reviewer reconcile certified costs to the general ledger and understand the basis for all adjustments without additional explanation?

Related-party transactions

• Developer fees, management fees, asset management fees, and other related-party transactions are not clearly supported by governing agreements
• Required approvals, calculations, or supporting schedules are incomplete
• The basis for accrued or deferred amounts isn’t clearly documented

Example: Fee calculations don’t reconcile to the partnership agreement or approved project sources and uses.

Audit perspective: Can the transaction be supported from agreement to calculation to accounting treatment?

Explore more: The pros and cons of using AI in connection with HUD and LIHTC projects

Controls exist but aren’t operating effectively

• Reviews are performed, but evidence of review isn’t retained
• Policies and procedures exist, but aren’t followed consistently
• Periodic file reviews or internal compliance monitoring are either not performed or not documented
• When an issue is identified, corrective actions focus on the issue, rather than the underlying cause

Example: Management states files are reviewed before move-in, but there’s no checklist, sign-off, or evidence that the review occurred.

Audit perspective: Is there evidence controls were performed, reviewed, and operating effectively throughout the year? If an issue is identified, is it clear whether the process needs improvement or whether the existing process was not followed?

How CLA can help identify HUD and LIHTC compliance risks

HUD and LIHTC findings often stem from misunderstood requirements, inconsistent application, or insufficient documentation.

CLA's affordable housing professionals help organizations identify compliance risks before they become findings. Whether the challenge involves tenant eligibility, rent calculations, financial reporting, reserve compliance, cost certifications, or internal controls, we can help you address issues early and strengthen day-to-day compliance practices.

By evaluating projects from both a compliance and financial reporting perspective, we can help identify gaps, improve consistency, and strengthen the connection between operations, documentation, and reporting.

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Identify HUD and LIHTC compliance risks before they become audit findings. Complete the form below to connect with CLA.