IRS Readies Compliance Surveys

FORT LAUDERDALE, Fla. The Internal Revenue Service plans to send out questionnaires to between 200 and 500 state and local governmental bond issuers later this summer that will ask them to provide extensive information indicating whether the bonds they have issued are still in compliance with tax laws and rules, an IRS official said here yesterday.

Speaking during a session on post-issuance compliance at the Government Finance Officers Association's annual meeting, Clifford Gannett, director of the IRS' tax-exempt bond office, gave a preview of what the governments can expect the form to request.

The survey is expected to include five parts, each addressing various areas of tax-exempt bond compliance. Many of the questions will stem from a survey that the IRS sent to charitable organizations last year, Gannett said, adding that survey yielded "very positive results."

The survey to be sent to governmental issuers will request: documents indicating timely spending of proceeds and their proper use; timely return filings; arbitrage calculations; information about an issuer's record retention program including what documents are retained; investment records; copies of contracts for construction and purchases paid for with proceeds; and information about any private activity in the project.

The survey also will inquire if an issuer has written procedures in place for post-issuance compliance and will go further than the survey for charitable organizations by asking when those procedures were implemented. In the survey for charitable organizations, a vast majority of the groups responded they had written procedures in place, but Gannett said the IRS suspected that many of those procedures were established or modified in response to the agency's inquiry.

Gannett stressed that the IRS is mainly seeking to obtain information from the questionnaires and said that an issuer's admitting that it only recently adopted written procedures is "not going to spark an examination." He said he hopes the survey's findings will help his office be more efficient with examination resources in the future.

"Basically, this is an information document," he said.

Nevertheless, Roger Anderson, executive director of the New Jersey Educational Facilities Authority and moderator of the panel, recommended that an issuer hire a tax specialist if it receives one of the questionnaires due to the large amount of information requested.

Gannett made clear that it will be important for governmental issuers to respond to the survey if they receive it. He said the IRS is considering taking enforcement action against the handful of charities that did not respond to the first survey.

"We'll probably do a little bit of examination activity for those who didn't respond," he said. But he added that the amount of non-responses was so small four out of 207 surveys it is possible that a change of address or some other non-negligent event could have led a charity to fail to respond.

Gannett announced yesterday that the Advisory Committee on Tax Exempt and Government Entities, a group of municipal market participants that provide recommendations to the IRS, will focus on record retention in the upcoming year in an attempt to help the IRS determine what types of documents need to be kept, and the amount of time they should be retained.

He also said he plans during the coming months to "seriously work on" a report that the ACT delivered to the IRS last week recommending the agency develop a streamlined version of its voluntary closing agreement program.

Anderson said the ACT's activity usually "telegraphs what [Gannett] is interested in."

Gannett also used the panel to address comments made about the random correspondence audits his office has sent out to issuers asking for documents tied to arbitrage rebate compliance. Some muni market participants had suggested that the IRS is undertaking the examinations simply because they can be processed quickly and can be used to reduce the office's average examination length, a figure that is released to the public.

"I can tell you that that's absolutely not the case," Gannett said yesterday. "Our cycle time is fine, and it has been all year." He added that the initiative was on the work plan at the beginning of the year, indicating that it couldn't have been added in response to statistics showing longer examination times.

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