WASHINGTON - Lawyers who are considering engaging in questionable tax practices for municipal bond transactions because the market turmoil has thrown deals into situations where there are no specific tax laws or rules should first check with the Internal Revenue Service, officials warned yesterday.
"It's really important for the bond community to recognize that [the IRS wants] to have a voice" to comment on market practices about which the agency may have has concerns, Clifford Gannett, director of the IRS' tax-exempt bond office, said during a teleconference sponsored by the National Association of Bond Lawyers.
"My message is: Don't go it alone" and risk becoming embroiled in a regulatory, civil, or criminal investigation later on, Gannett said. "It's just too much of a hassle to not know up front whether you're doing the right thing."
Gannett made the remark after Maxwell Solet, a lawyer at Mintz Levin Cohn Ferris Glovsky and Popeo PC in Boston, who moderated the teleconference, noted that the financial crisis has left some muni market participants facing situations where there is little or no tax guidance.
For example, he said, some issuers cannot get three competitive bids on investment contracts, a requirement that must be met in order for the price of the contract to be treated as fair-market value for purposes of complying with arbitrage rules.
Gannett said that transaction participants with tax questions such as this can call him at - at 202-283-9820 - if they do not have time to seek a private-letter ruling.
"We want to be able to give you timely responses," he said. He added that the tax-exempt bond office has a very strong relationship with the IRS chief counsel's office and is "willing to pick up the phone" to obtain guidance.
Much of the teleconference focused on the questionnaires that the IRS sent yesterday to 200 governmental issuers asking about their post-issuance compliance and record-retention procedures and practices. Solet asked Gannett about remarks that IRS officials had made to reporters in December that the agency may follow up some of these questionnaires with audits.
"We're going to have to take a look at the information that we receive back," Gannett said. "If we find the need, we may want to validate [the information] based on a review of books and records in certain instances. We're going to leave that as a possibility. But it certainly is not the focus of this initiative. The focus is more directed at education."
TEB wants to learn more about issuers' post-issuance compliance practices so it can craft better guidance, Gannett said, and the office also hopes the survey will push issuers to improve their practices in this area. Issuers' responses to the questions about record retention will be considered in a project underway by an IRS advisory group to issue guidance on how long issuers should keep records, he said.
Solet noted that the questionnaires ask issuers for written post-issuance compliance procedures when the tax laws and rules do not require muni issuers to have these in place. He asked Gannet if the IRS is now taking the stance that there is such a requirement.
No, Gannet said, but TEB has found that issuers that have written compliance procedures are much more likely to be in compliance with post-issuance tax requirements.
Solet asked if an issuer's tax compliance certificate for a transaction could serve as a written post-issusance compliance procedure.
"I think it could," said Steve Chamberlin, senior manager of TEB's compliance and management program, who was also on the panel. But he added that the issuer should tell the IRS how it uses or follows that document. "What we're looking for is what issuers are doing" on post-issuance compliance, he said.
Also on the panel was Leonard P. Wales, debt manager for Fairfax County, Va., and a member of the Government Finance Officers Association's debt management committee. He asked Gannett what post-issuance compliance problems are most often found by TEB.
Gannett said there are frequent problems with the changed use of a bond-financed facility or land purchased with bond proceeds that sits dormant and is later used for a different purpose. As an example, he cited a facility financed with taxable debt that was later renovated with tax-exempt debt. The management contract for the facility initially was modified to reflect tax-law restrictions after the renovation, but later when renewed, it reverted back to the initial form without those restrictions.
Gannett also expressed surprise and distress in finding that 10% to 15% of issuers do not appear to be compliant with arbitrage requirements.
Record-retention was also a subject of much discussion during the teleconference. Solet said that while some issuers have questioned what authority the IRS has to require bond issues to keep bond-related records, the tax law requires certain tax-related records be retained until after the statute of limitations for tax law violations would run out. In the muni bond area, that would be three years after the bonds mature, he said.
Gannett said that Section 6001 of the tax code - which has been in effect since the 1950s - and underlying rules require taxpayers to maintain sufficient documentation to justify income, dividends, and other figures reported on tax returns.
"We understand the size of the burden resulting" from the law and the rules, Gannett said. "We're trying to come with reasonable standards and limitations programs."
He said he could envision requirements that include safe harbors under which, if issuers take certain steps to retain records, the IRS will deem their record-retention procedures are reasonable.
The Advisory Committee on Tax-Exempt and Governmental Entities has been working with TEB on the issue and plans this summer to release "a kind of briefing memo" on record retention for muni issuers, as well a "guidance document" that makes recommendations to TEB and other IRS offices, Gannett said.
Turning to IRS efforts to streamline the voluntary compliance program, Solet asked the officials why they did not adopt advisory committee recommendations that issuers be allowed to identify certain minor violations and then calculate their penalties and send checks to the IRS.
"It is administratively difficult for our office to just receive checks out of the blue," Chamberlin told him. The IRS' recent inclusion in a manual for employees of a list of certain "covered violations" and suggested penalties is a "first step" toward the advisory committee's recommendations and that list will probably be expanded, he said.
Gannett also noted that the economic stimulus legislation pending in Congress contains many bond measures and said that if it is enacted he expects to get "increased resources" within TEB to implement them.
"We are preparing," he said.