Market Eyes Streamlined VCAP System

WASHINGTON — The Internal Revenue Service should adopt a streamlined version of its voluntary closing agreement program under which issuers would pay specific monetary penalties for predetermined and relatively minor tax law and rule violations, municipal market participants advising the agency said yesterday.

At a meeting here, members of the tax-exempt project team for the Advisory Committee on Tax Exempt and Government Entities told IRS officials, including commissioner Douglas Shulman and tax-exempt bond director Clifford Gannett, that VCAP needs a simple and efficient way for issuers to come forward and address common violations of federal tax law.

The current VCAP is "time-consuming and expensive" for minor violations, said Maxwell Solet of Mintz Levin Cohn Ferris Glovsky & Popeo PC in Boston, the outgoing chair of both the bond team and the ACT committee.

The Streamlined Closing Agreement Program, or SCAP, would be a subset of VCAP and would provide "a simple, predictable, low-cost procedure ... to voluntarily correct violations of federal tax law," Solet said yesterday in a presentation to IRS officials. Greater efficiency would "allow IRS personnel to be better utilized for more complex situations that do require individualized attention," he added. Under the streamlined program, an issuer could reach an agreement with the IRS within three to four weeks, compared to several months under VCAP.

Gannett was supportive of the recommendation, saying it provides a "nice template" for his office going forward.

"This report might be the catalyst for us to take the next step with program," he said.

The recommendations come as various muni groups have expressed widespread concern about the amount of time it takes to reach a voluntary closing agreement. The report noted these concerns as well as complaints that the VCAP's requirement that an issuer or representative must meet individually with an agent makes the program "disproportionately costly in the case of certain less significant violations."

Under the proposed SCAP, the IRS would establish a list of "covered violations" that "can be clearly described so that it is possible for an issuer or conduit borrower readily to determine that its circumstances are within the description," and that do not allow for "significant variation in material facts." If an issuer commits one of the violations listed, it will know what the penalties are if it decides to pursue an SCAP agreement.

In an appendix to the report, the group offered some possible covered violations, including: failure to timely reinvest refunding escrow in state and local government series securities, non-compliance with "mixed escrow" rules, de minimis nonqualified use of bond-finance facilities, excess use of bond proceeds to pay issuance costs, use of bond proceeds for projects not included in a required previously filed notice, and the failure to make a timely identification of a hedge.

The ACT suggested the list be revised and expanded over time as the IRS gains experience with the program and the industry provides its input. The committee also recommended that an issuer still be allowed to pursue a traditional voluntary closing agreement even if the violation in question appears on the streamlined list.

If an issuer finds it has committed a covered violation, it would file a "compliance certificate" with the IRS, in which it would identify where it is violating the tax code, affirm that it attempted to adhere to the code in good faith, detail how it plans to implement changes to address the violation, agree to enter into the predetermined closing agreement, and send a check for the predetermined payment.

If the IRS enter into such an agreement, the matter would be concluded. Or, if the IRS finds the request for such an agreement insufficient, it could reject it and note its insufficiencies, perhaps through a standard form. The issuer could then refile a revised request or pursue a traditional voluntary closing agreement.

The committee claimed the new program would be onerous enough to serve as a deterrent for issuers considering deliberate noncompliance, despite the streamlined procedures and set penalties.

"The time investment necessary even for application for SCAP relief, together with the awkwardness of admitting to a violation of the law, in almost all cases will prevent SCAP from being a disincentive to original compliance," the report stated.

In addition to recommending the SCAP, the committee said the IRS should devote more resources and personnel to its entire closing agreement program.

"Resources committed to the existing VCAP program have been inadequate to allow prompt processing of applications," the report stated. "The ACT hopes that the availability of simplified SCAP procedures will encourage a far greater demand for voluntary closing agreements, [resulting in] a significant increase, not a decrease, in personnel needed to administer the program."

Furthermore, the committee said that the IRS' increased focus on post-issuance compliance, which the committee recommended in 2007, will also increase the need for an efficient voluntary program.

"It would be a severe disappointment to the bond community if, having encouraged voluntary efforts to identify tax compliance problems, the IRS were to be incapable of assisting issuers and conduit borrowers to remedy them," Solet said.

Currently, the IRS has the equivalent of three or four full time employees working on the VCAP. Gannett said in an interview yesterday that he is aware of the need to increase manpower in that area to make it more efficient. He said he would like to increase VCAP staff, but declined to offer specifics, saying that other areas of his office also need more staff.

In addition to the proposed SCAP, the ACT recommended the TEB office also adopt two alternative streamlined programs; one for violations of a small dollar amount, and another for violations involving inadequate record keeping. While the committee wants to see agreements in these two areas also made more efficient and affordable, it did not include them in the SCAP proposal because the material facts, and procedures for handling each case, would vary.

Yesterday's ACT meeting was the last for Solet, who is leaving the committee at the end of the year, but the first for Michael Bailey, a partner at Foley & Lardner LLP in Chicago, who is taking Solet's place. Bailey joins returning members Joan M. DiMarco of BondResources Partners LP in Philadelphia and John G. Pasicznyk of the Dormitory Authority of the State of New York on the tax-exempt bond team.

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