In addition to including qualified sick leave wages in the amount of wages paid to the employee reported in Boxes 1, 3 (up to the social security wage base), and 5 of Form W-2 (or, in the case of compensation subject to the RRTA, in the amount of RRTA compensation paid to the employee reported in Boxes 1 and 14 of Form W-2⁵), employers must report to the employee the following type and amount of the wages that were paid, with each amount separately reported either in Box 14 of Form W-2 or on a separate statement:

If a separate statement is provided and the employee receives a paper Form W-2, then the statement must be included with the Form W-2 provided to the employee, and if the employee receives an electronic Form W-2, then the statement shall be provided in the same manner and at the same time as the Form W-2.

In addition to including qualified family leave wages in the amount of wages paid to the employee reported in Boxes 1, 3 (up to the social security wage base), and 5 of Form W-2 (or, in the case of compensation subject to RRTA, in the amount of RRTA compensation paid to the employee reported in Boxes 1 and 14 of Form W-2), employers must separately report to the employee the total amount of qualified family leave wages paid to the employee under the EFMLEA either in Box 14 of Form W-2 or on a separate statement. In labeling this amount, the employer must use the following, or similar, language: “emergency family leave wages.” If a separate statement is provided and the employee receives a paper Form W-2, then the statement must be included with the Form W-2 sent to the employee, and if the employee receives an electronic Form W-2, then the statement shall be provided in the same manner and at the same time as the Form W-2.

As part of the Instructions for Employee, under the instructions for Box 14, for the Forms W-2, or in a separate statement sent to the employee, the employer may provide additional information about qualified sick leave wages and qualified family leave wages and explain that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income. The following model language (modified as necessary) may be used:

“Included in Box 14, if applicable, are amounts paid to you as qualified sick leave wages or qualified family leave wages under the Families First Coronavirus Response Act. Specifically, up to three types of paid qualified sick leave wages or qualified family leave wages are reported in Box 14:

If you have self-employment income in addition to wages paid by your employer, and you intend to claim any qualified sick leave or qualified family leave equivalent credits, you must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with your income tax return and reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages. If you have self-employment income, you should refer to the instructions for your individual income tax return for more information.”

Any collection of information associated with this notice has been submitted to the Office of Management and Budget for review under OMB control number 1545-0008 in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). An agency may not conduct or sponsor and a person is not required to respond to a collection of information unless it displays a valid OMB control number.

The principal author of this notice is Michael Gitlin. For further information on the provisions of this notice, please contact Mr. Gitlin at 202-317-6798 (not a toll-free number).

¹ As of the date this Notice is being released, the U.S. Department of Health and Human Services has not yet specified any other such conditions.

² Under sections 7001(d)(4) and 7003(d)(4) of the Families First Act, these credits do not apply to the government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing.

³ The credit for the employer’s share of Medicare tax does not apply to eligible employers that are subject to Railroad Retirement Tax Act (RRTA) because under section 7005(a) of the Families First Act qualified leave wages are not subject to Medicare tax under RRTA due to that section’s reference to section 3221(a) of the Code, which includes both social security tax and Medicare tax.

⁴ Sections 7001(g) and 7003(g) of the Families First Act provide that sections 7001 and 7003 apply to wages paid with respect to the period beginning on a date selected by the Secretary of the Treasury which is during the 15-day period beginning on the date of the enactment of the Families First Act (March 18, 2020). Notice 2020-21, 2020-16 I.R.B. 660, provides that the tax credits for qualified sick leave wages and qualified family leave wages under sections 7001 and 7003 of the Families First Act apply to wages paid for the period beginning on April 1, 2020, and ending on December 31, 2020.

⁵ Railroad employers are directed by the instructions to Form W-2 to report certain specified amounts in Box 14. Other employers are directed to use Box 14 “for any other information that you want to give to your employee. Label each item.” This notice directs all employers to use Box 14 to report qualified sick leave wages and qualified family leave wages, unless a separate statement is used instead.

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 42 of the Code.

Section 42(m)(1) requires an Agency to allocate housing credit dollar amounts (the potential to earn low-income housing credits) among candidate proposed buildings/projects. The allocation must be pursuant to a qualified allocation plan (QAP) that has been approved by the governmental unit of which the Agency is a part. A QAP not only sets forth selection criteria by which an Agency makes these allocations but also provides a procedure that the Agency must follow in monitoring for noncompliance with the provisions of section 42, including monitoring for noncompliance with habitability standards through regular site visits.

Section 1.42-5 of the Income Tax Regulations (the compliance-monitoring regulations) provides the requirements of a monitoring procedure that must be part of any QAP. Among the requirements, an Agency must perform physical inspections and low-income certification review.

The compliance-monitoring regulations, however, do not require that every low-income unit in a project be monitored for noncompliance. Instead, Agencies are permitted to satisfy their compliance-monitoring duties by physically inspecting, and performing low-income certification review, on only samples of those units. See T.D. 8430, 57 FR 40118, 40121 (Sept. 2, 1992).¹ For many years, starting in 2000, the minimum sample size for both file review and on-site inspections was 20 percent of the low-income units, regardless of the size of the total population of low-income units in a project. See T.D. 8859, 65 FR 2323, 2327 (Jan. 14, 2000).

On February 25, 2016, the Treasury Department and the IRS published temporary regulations (T.D. 9753) in the Federal Register (81 FR 9333), which amended §1.42-5 of the Income Tax Regulations and permitted the IRS to establish sample-size criteria in guidance published in the Internal Revenue Bulletin. See §601.601(d)(2)(ii)(b) of 26 CFR Chapter 1.² Concurrently with the issuance of the temporary regulations, Revenue Procedure 2016-15, 2016-11 I.R.B. 435, was published in the Internal Revenue Bulletin. This revenue procedure permitted an Agency to elect to use sample sizes of either a minimum of 20 percent of the low-income units in a project (rounded up to the nearest whole number) or the number in a chart identifying minimum sample sizes depending on the number of low-income units in a project (the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart). The minimum sample sizes in the chart correspond to the minimum sample sizes required by the Department of Housing and Urban Development’s (HUD’s) Real Estate Assessment Center for inspections under HUD programs (the REAC numbers). HUD designed this table of sample sizes to produce a statistically consistent level of confidence in the results of physical inspections across a broad range of project sizes.

The revenue procedure had the effect of reducing the minimum sample sizes for large low-income housing projects (those with more than 110 low-income units). Because of the choice between using the REAC number and 20 percent of the low-income units, the revenue procedure did not impact projects with fewer than 111 low-income units.

The same sample-size provisions applied to independently selected samples on which the Agency must perform low-income certification review. The revenue procedure provided only minimum sample sizes, permitting Agencies to monitor compliance in more units, if desired.

In the preamble to the temporary regulations, the Treasury Department and the IRS expressed concern that, in smaller projects, physical inspection or low-income certification review of only 20 percent of the units might fail to produce sufficiently accurate estimates of the remaining units’ overall compliance with habitability and low-income certification. To address this concern, the preamble added that “the Treasury Department and the IRS intend to consider whether Rev. Proc. 2016–15 should be replaced with a revenue procedure that does not permit use of the 20 percent rule in those circumstances.” 81 FR at 9334. The removal of the 20 percent option would generally increase the number of units that needed to be inspected in smaller projects. The public comments on the temporary regulations directed very little attention to this potential increase.

In addition, the preamble invited fundamental suggestions to make inspections less burdensome:

The Treasury Department and the IRS believe the methods in Rev. Proc. 2016-15 reasonably balance the burden on Agencies, tenants, and building owners while adequately monitoring compliance. However, additional comments may be submitted on other possible methods, including stratified sampling procedures and estimation methodologies. To be useful, any such comments should include substantial detail regarding the procedures to be adopted and should provide thorough justification as to whether the suggested methods effectively reduce burden without negatively impacting the confidence that can be placed in the results obtained from the resulting samples.

Id. at 9336. The public submitted no comment letters specifically responsive to this request.

On February 26, 2019, the Treasury Department and IRS published regulations (T.D. 9848) in the Federal Register (84 FR 6076), finalizing the temporary regulations. Because these final regulations contain provisions directly addressing all issues previously addressed in Revenue Procedure 2016-15, the preamble of the final regulations declares that revenue procedure obsolete with respect to an Agency as of the date on which the Agency’s QAP is amended to reflect the final regulations and, in all cases, after December 31, 2020. See 84 FR at 6078. Among other provisions, the final regulations require Agencies to inspect no fewer units than the number specified for projects of the relevant size in the REAC numbers. This requirement has the effect of increasing the sample sizes for smaller projects. The Treasury Department and the IRS determined that the REAC numbers produce a statistically valid sampling of units and that using them yielded a consistent level of confidence in the compliance-monitoring results for projects of various sizes. The final regulations allow Agencies a reasonable period of time to amend their QAPs for this purpose, but require QAPs to be amended no later than December 31, 2020.

Since the publication of the final regulations, the Treasury Department and the IRS have received numerous oral and written comments from Agencies, stakeholders, and trade groups representing Agencies. In particular, these comments expressed concern that the final regulations ended Agencies’ ability to use samples of 20 percent of the low-income units in a project when the applicable REAC number is larger. Consistent with the comments and letters, the trade groups’ comment letters expressed concern about the situations in which the REAC numbers would increase the number of units that Agencies must examine, thereby increasing Agencies’ costs for additional staff and other related expenditures and burdens. One trade group further explained that many Agencies would encounter difficulty in addressing increased staffing needs and other new costs due to overall State budget constraints. The trade group observed that cost increases are also likely to cause Agencies to increase the compliance-monitoring fees that they charge to building owners. If fees are not increased enough to cover the increased costs, Agencies will have to divert resources from other affordable housing priorities to fund their compliance-monitoring activities. The trade group noted that terminating the ability to use the 20 percent samples will have its most significant impact on States with numerous small projects, predominantly in rural areas, and that some States with only small projects may even experience a 100 percent increase in burden.

The final regulations reflected the belief of the Treasury Department and the IRS that a higher compliance-monitoring burden on Agencies was justified by the increased statistical confidence that results from the use of the REAC numbers to determine sample sizes for smaller projects. The comments on the final regulations, however, have demonstrated the magnitude of the increased costs and burdens that this requirement imposes on Agencies. As a result of these comments, the Treasury Department and the IRS have greater awareness of the many practical challenges Agencies experience in using samples greater than 20 percent while carrying out their compliance-monitoring responsibilities. Furthermore, the comments noted that many Agencies typically evaluate each project to determine if circumstances warrant the inspection and review of more units than the required minimum. Complying with the REAC numbers when an Agency believes that smaller samples would be sufficient may have the effect of depriving the Agency of the resources that it requires to engage in additional compliance-monitoring activities on projects that manifest the need for inspection and review of more than the minimum sample of units.

Although there is value in providing a level of confidence that is more consistent over a broad range of project sizes, that increased consistency is outweighed in this context by concerns over Agencies’ compliance-monitoring burdens. One goal of the compliance-monitoring regulations is to increase flexibility and reduce burden, so that Agencies may fulfill their compliance-monitoring responsibilities in an efficient and cost-effective manner. Accordingly, the Treasury Department and the IRS propose returning to the sample-size requirements that applied under the temporary regulations. Thus, under these proposed regulations, the minimum number of low-income units that must be included in the random samples on which an Agency conducts physical inspections or low-income certification review is the lesser of the applicable REAC number or 20 percent of the low-income units in the project, rounded up to the next whole number.

These regulations are proposed to apply beginning after the date these regulations are published as final regulations in the Federal Register. However, an Agency may rely on these proposed regulations beginning on February 26, 2019, until December 31 of the calendar year following the year that contains the date these regulations are published as final regulations in the Federal Register.

This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations.

In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 6) it is hereby certified that these regulations will not impose a significant economic impact on a substantial number of small entities. These regulations reinstate the minimum compliance-monitoring sampling requirement for purposes of physical inspections and low-income certification review previously provided under the temporary regulations (T.D. 9753) published in the Federal Register (81 FR 9333) on February 25, 2016. These previously provided requirements had been and continue to be relied upon by Agencies since 2016.

Pursuant to section 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in the preamble under the “ADDRESSES” section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any electronic comments submitted, and to the extent practicable any paper comments submitted, will be made available at www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register. Announcement 2020-4, 2020-17 IRB 1, provides that until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities.

The principal authors of these regulations are Dillon Taylor and Michael J. Torruella Costa, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development.

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Amend §1.42-5 by revising paragraphs (c)(2)(iii)(B) and (h) to read as follows:

§1.42-5 Monitoring compliance with low-income housing credit requirements.

* * * * *

(c) * * *

(2) * * *

(iii) * * *

(B) Number of low-income units. The minimum number of low-income units for which the Agency must conduct on-site inspections and low-income certification review is the lesser of—

(1) 20 percent of the low-income units in the low-income housing project, rounded up to the nearest whole number of units; or

(2) the Minimum Unit Sample Size set forth in the following Low-Income Housing Credit Minimum Unit Sample Size Reference Chart:

* * * * *

(h) Applicability dates. The requirements in paragraph (c)(2)(iii)(B) of this section apply beginning after the date final regulations are published in the Federal Register.

Douglas W. O’Donnell,

Acting Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on July 2, 2020, 4:15 p.m., and published in the issue of the Federal Register for July 7, 2020, 85 F.R. 40610)

¹ Initially, the requirements were that the Agency choose which units receive low-income certification review, that the owner receive no more than reasonable notice of the review, and that the Agency have the right to perform on-site inspection. See T.D. 8430 at 40122-23. Subsequently, some on-site inspections were required, and samples for both review and inspection were required to be chosen randomly. See T.D. 8859, 65 FR 2323, 2327 (Jan. 14, 2000).

² Also in the same issue of the Federal Register, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-150349-12, 81 FR 9379) (proposed regulations). The text of the proposed regulations incorporated by cross-reference the text of the temporary regulations.