TEB Widens Scope With Survey, Research

WASHINGTON - The Internal Revenue Service's tax-exempt bond branch plans to extend the breadth of its activities in 2009, as it rolls out a post-issuance compliance survey to roughly 200 governmental bond issuers that could be followed up with audits, and launches several targeted research projects examining how bond proceeds are spent.

TEB also will continue to examine abusive transactions and derivatives and will enhance its voluntary closing agreement program, according to IRS officials and market participants.

The IRS plans to send out the post-compliance surveys to governmental bond issuers in January, after delaying them for three months because of market turmoil. Issuers will have between 60 and 90 days to respond to the surveys, twice as much time as was given the charitable and nonprofit organizations that were the first groups to receive post-issuance compliance surveys from the IRS earlier this year.

And while the IRS assured the charitable and nonprofit groups that the surveys would not result in audits, agency officials are now reserving the right to follow the governmental survey responses with audits if necessary.

Although less than half of the 192 charitable groups surveyed this summer could prove they had written procedures in place to ensure their bonds remained compliant with tax law requirements after they were issued, those findings did not drive the decision to consider audits as a follow-up for the governmental issuer surveys, according to IRS officials.

"When we were developing the charitable financing survey, we talked long and hard about whether we should do follow-up audits," said Steve Chamberlin, the head of the IRS bond branch's office of compliance and program management. For the first round of surveys, they opted not to audit responses, but the IRS bond team may use the examinations to follow up some governmental survey responses.

Susan Gaffney, director of the Government Finance Officers Association's federal liaison center, said she hopes the IRS adopts "consistent and transparent" policies for determining which survey responses are audit-worthy.

Chamberlin said audits could be an option "both in instances where we'd like more information about they've told us, or just to do some validity checks." However, he emphasized that what the IRS does with the survey responses will largely depend on the responses.

"We may want to sample a couple of them randomly just to look a little deeper as to why they answered a question the way they did," he said. "But we want to be very careful and not get too far ahead of ourselves."

Ed Oswald, a partner at Orrick, Herrington & Sutcliffe LLP here and former attorney-adviser for tax-exempt bonds in the Treasury Department's Office of Tax Policy, said the governmental surveys are just the latest step in TEB's increasing interest in post-issuance compliance.

The survey represents "further evidence of the IRS' focus on post-issuance compliance and looking at how bond proceeds have been applied and used after the bonds have been issued," he said

"One could argue that for the first eight to 10 years of the TEB enforcement program, its focus was essentially looking at the facts and structures of bond issues on the date they were issued," he added. "There wasn't a real focus on post-issuance compliance, and I think as the enforcement and oversight program matures ... it's becoming more sophisticated."

"They've essentially expanded their bandwidth in terms of sophistication and levels of review," he said.

The survey also marks the latest "soft contact" initiative by the IRS. These initiatives focus on gathering information and educating the industry about IRS priorities without necessarily engaging in audits. TEB officials have said they are pleased with the feedback they've received on the initiatives, beginning with the charitable surveys.

"The current leadership of the IRS should really be applauded for their soft contact initiative," Oswald said. "I think if you're trying to change behavior and educate ... soft contact is exactly the right approach. People will take notice of it and know that they may need to change behavior."

Chamberlin said the TEB office could follow up the governmental survey with initiatives targeted at other market sectors, but that no decisions have been made yet.

"We'll get the responses back, take a look at them, and decide where we want to go from there," he said. "The format of a broad, open-ended survey really can lend itself to every market segment that we deal with ... I don't think we're limited."

However, since the surveys were drafted with post-issuance compliance issues in mind, there are currently no plans to expand the soft contact initiatives to other compliance areas, Chamberlin said.

TEB field agents also will be looking into post-issuance compliance as part of three separate research projects on charter school financings, tax increment financing projects, and tax-exempt financings for community development districts.

Robert Henn, senior manager of TEB field operations, said the agency targeted these areas because it has "limited knowledge" about them. Field agents will examine what happens to bond proceeds in each of these areas. The research projects are designed to be information-gathering projects and will not necessarily result in audits, he said, adding that, of those three sectors, agents only suspect ongoing noncompliance in connection with community development districts.

VOLUNTARY COMPLIANCE Another TEB program that could be changed in 2009 is the voluntary closing agreement program, or VCAP.

In June, the Advisory Committee on Taxation, which is made up of market participants, recommended that TEB establish a streamlined closing agreement program. Under the so-called SCAP, the IRS would establish a predetermined list of minor commonplace violations and assign predetermined penalties for them. Issuers could then tell the IRS when they have committed these violations and settle with the agency for the predetermined penalties.

The bond branch took a step in this direction earlier this month when it updated its Internal Revenue Manual to identify eight common violations and possible penalties for them. The penalties could be modified depending on the unique facts and circumstances of each case.

Chamberlin said TEB hopes to continue adding to the list, but will not likely institute an SCAP exactly like the one the ACT recommended.

"The IRM procedures that we put out are a good solid first step in that direction. It's by no means a finished product," he said. "But some of the ideas that [the advisory committee] proposed are really great ideas but difficult for us to implement ... Just sending in a closing agreement with a check out of the blue is a bit difficult for us to handle administratively."

However, he emphasized that TEB is focused on enhancing its transparency "to let the industry have a better sense of where we're going."

OTHER INITIATIVES As for the rest of TEB's operations, officials said they hope to build on what they accomplished in 2008 and to increase these efforts in 2009. TEB aims to close around a total of 545 cases, of which 475 are field examinations and 70 are VCAP settlements, during the fiscal year, which began Oct. 1.

TEB director Cliff Gannett said also that his team hopes to continue its focus on abusive transactions, which yielded $19 million of the $50 million his office brought in from closing agreements in fiscal 2008.

Another area Gannett said he wants to continue to examine is derivatives, particularly interest rate swaps.

In its fiscal 2009 work plan, TEB stated that it plans to move forward with a "small sample" of examinations of qualified student loan bonds it began in fiscal 2008, and also plans on beginning some audits of certain kinds of specialty tax-exempt and tax-credit bonds. Qualified green building and sustainable design project tax credit bonds could be a target, the branch indicated.

Other areas in which TEB plans to allocate resources in fiscal 2009 include: solid waste disposal facilities, loan pools, yield-burning allegations, qualified zone academies, hospitals, and single- and multifamily housing.

While the Treasury Department has had to adjust its resources to address a number of emerging issues stemming from the financial crisis and economic downturn in recent months, Gannett said these issues have only reinforced the appropriateness of TEB's stated goals, which are not expected to change throughout 2009.

"Some of the areas that we've had concerns about obviously have been highlighted during the crisis," he said. "I think we feel like we're right on track."

However, he added that while the agenda should remain "pretty routine," TEB may modify its plan in situations where initiatives threaten to overburden certain portions of the market.

"We'll continue to be open in that regard, listening to the bond community and trying to be responsive where we think relief is appropriate," he said.

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