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Example 1: Estimating Potential Tax

IRS IRC § 42 Audit Technique Guide — Part I (Introduction and Pre-Contact Analysis) · 2026 edition · updated 2026-07-29 · United States

A taxpayer was allocated a credit of $30,000 for one low-income building. During 2007, the fifth year of the credit period, the state agency determined that the project was no longer incompliance or participating in the IRC §42 program, and reported its finding to the IRS on Form 8823. The taxpayer, however, disregarded the state agency's determination and claimed the credit. The taxpayer's tax return for the fifth year was audited. For purposes of quickly estimating the potential adjustment, the examiner identified the following:

  • The $30,000 credit claimed for 2007 was not allowable.

  • The taxpayer claimed $30,000 for the 2003, 2004, 2005, and 2006 tax years.

  • The credits are subject to recapture under IRC 42(j).

    • The credit portion of the recapture amount is $30,000 x .333 x 4 years = $39,960.

  • See Credit Disallowance and Recapture for explanation of the recapture percentage (.333).

Note: The recapture amount also includes an interest portion calculated separately for each year. The computation is complex and should not be attempted for purposes of the risk analysis.

  • The taxpayer will not be able to claim credit in any of the remaining years of the 10-year credit period. 5 x $30,000 = $150,000.

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▸Contents — IRS IRC § 42 Audit Technique Guide — Part I (Introduction and Pre-Contact Analysis)
IRS IRC § 42 Audit Technique Guide — Part I (Introduction and Pre-Contact Analysis)

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