Rental subsidies are excluded from income under the general welfare exclusion doctrine. However, fraudulently obtained public assistance is taxable income. Therefore, a rental subsidy fraudulently obtained could be taxable income to a subsidized housing tenant. Subsidized housing tenants are required to authorize the public housing agency to access their tax return information from the IRS. Low-income taxpayers are often targeted by unscrupulous tax preparers who put false 1099 income on their tax returns to make the taxpayers eligible for large EIC refunds. Of course, the preparer then takes a large fee from those refunds. This can result in serious problems for taxpayers who are receiving any public subsidies based on income guidelines. They may be forced to pay back the subsidies.
Other examples of housing assistance excluded from income by the general welfare exclusion doctrine are relocation payments to move from a damaged home,1 temporary housing assistance for disaster victims,2 replacement housing for people displaced from their homes,3 assistance with the purchase of homes,4 home improvement grants,5 and forgivable loans.6 Relocation payments under the Uniform Relocation Act are not considered income for federal tax purposes.7
Utility allowance refunds for federally subsidized tenants should not be taxable income because they are a recovery or refund of non-taxable public assistance that should have been granted to the tenant. Be sure to advise clients that the assistance is not taxable and that they need to timely respond to any IRS audit notices. It is also advisable to provide the entity paying the refunds with the legal authority demonstrating that the refunds are non-taxable to avoid improper issuance of Forms 1099 to your clients. If the housing agency wrongly reports the litigation recovery as income to the IRS, contact your local Taxpayer Advocate for systemic relief to prevent IRS audits of your clients.
- 1Rev. Rul. 98-19, 1998-1 C.B. 840.
- 2Rev. Rul. 2003-12, 2003-1 C.B. 285.
- 3Rev. Rul. 74-205, 1974-1 C.B. 20.
- 4ILM 200910029, Doc. 2009-5050, TNT 43-23. But see LTR 201004005 (Oct. 21, 2009), Doc. 2010-221, 2010 TNT 20-24.
- 5Rev. Rul. 76-395, 1976 C.B. 16.
- 6Notice 2011-14, 2011-11 I.R.B. 544.
- 742 U.S.C. § 4636.