Coming Soon: Electronic BAB Subsidies

WASHINGTON — Issuers of direct-pay Build America Bonds will be able to receive their subsidy payments from the Treasury Department electronically beginning in 2010, a top Internal Revenue Service official said yesterday.

Clifford Gannett, the director of the IRS’ bond office, promised the bond community that BAB issuers will be able to opt into an electronic direct-deposit program next year, as an alternative to the current arrangement under which checks are mailed to issuers. He made his comments during a teleconference sponsored by the National Association of Bond Lawyers.

“I can guarantee you that one improvement will be the ability to have the payment transmitted by direct deposit — that will happen in the beginning of this coming year,” he said. “That’s an important improvement for us, and that’s one that’s going to happen very quickly.”

Since the BAB program’s creation, some issuers have aired concerns over the fact that the subsidy payments, which are supposed to arrive on the date interest payments on the bonds are due, would be paper-based and sent in the mail, calling it outdated and potentially unreliable.

Treasury Department and IRS officials had said that shifting to an electronic system was a top priority and had announced in an April notice outlining the program that it would “actively pursue refining” the payment process, ultimately hoping to move to an electronic system similar to the one operated by the Bureau of Public Debt for payments on state and local government series securities.

Gannett said yesterday that they have been meeting with the bureau to discuss the matter, and that his team has already made $76 million in direct payments in the form of paper checks.

The tax-exempt bond office chief also used the teleconference as an opportunity to shine some light on how his office is processing the Forms 8038-CP, which are the documents BAB issuers must file to request subsidy payments.

Two teams of revenue agents have been charged with handling the BAB payment paperwork, he said. The first team reviews every form to see if the information is accurate and if the bonds qualify as BABs. It does this mainly by comparing the information about the bonds on Form 8038-G, with the information on Form 8038-CP.

Gannett said his team will be conducting additional research, including checking the MSRB’s Electronic Municipal Market Acess system for bond documentation that shows what BABs are being used for and whether they qualify as BABs.

Gannett said IRS agents also may contact issuers with questions they have about the payment form, and he said some transcription errors have already been caught with this method.

If evidence of fraud or questionable features arise during these initial compliance checks, the forms are handed off to the second team, which will begin “expedited exams.” Speed will be a top priority, Gannett said, noting his office is focused on resolving any issues so the payments can be made on time. Technical errors on the paperwork will be noted, but payments will not be blocked unless there is a clear reason for doing so, he said.

Gannett added that during particularly busy times, some of the BAB workload will be handed off to the new government entities compliance unit, which will assist the TEB office as well as any other IRS staff handling state, local, and tribal government issues.

“This is obviously a challenging job that we have before us, but I think ... we’ve brought the resources to bear to really do the job,” he said.

As far as enforcement of BABs after issuance, Gannett said the initial examination steps will mirror those for traditional muni bonds. If the IRS suspects problems exist with BABs selected for an audit, the issuer will still receive a Form 5701 outlining the perceived problems with the bonds.

The IRS will file a proposed adverse determination letter if those problems are not addressed. The issuer will have the right to appeal the decision with the service. If the Office of Appeals upholds the original adverse determination, the agency will then file a notice of deficiency for erroneous subsidy payments. At that point, the issuer will have the option of taking the matter to the U.S. Tax Court, a move normally not available to tax-exempt issuers.

Gannett also said that in cases where fraud is suspected, the IRS will stop payments immediately. In cases where the service suspects the bonds do not qualify as BABs but are not fraudulent, payments probably will stop when the adverse determination is filed, he said.

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Washington
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