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Outlook 2010: Tax Enforcement

Beefed-Up IRS Is Ready to Roll

WASHINGTON — The Internal Revenue Service’s tax-exempt bond office plans to move full-speed ahead in 2010, now that it has cleared some administrative hurdles in incorporating large new stimulus programs into its workload and put to work newly trained hires that have nearly doubled the size of the TEB unit.

Clifford Gannett, director of the office, said earlier this month that his team wants to close 700 audits in fiscal 2010, which began on Oct. 1.

That would be a boost from fiscal 2009’s goal of 475 — a mark TEB surpassed by closing 581 exams, the most in its history.

Gannett said the recent grand jury indictment of CDR Financial Products Inc. and a current and former official on nine criminal counts for alleged bid-rigging of municipal investment agreements and derivatives contracts “underscores the importance of our enforcement program.”

The indictment stems from the Justice Department’s antitrust investigation of alleged anticompetitive practices in the municipal market.

The probe was spurred by IRS enforcement cases and involves the agency’ criminal investigations division.

Gannett said TEB hopes next year to close 420 compliance checks, an example of the “soft-contact” approach to compliance that the IRS has put into place over the last two years. These are surveys or questionnaires, which IRS officials believe are an efficient, less burdensome way to obtain information than through audits.

The goal of 420 for next year would exceed the 372 compliance checks closed during the last fiscal year, which surpassed the bond branch’s goal of 220. Closures stemming from the voluntary closing agreement program — as well as the office’s outreach efforts — also exceeded expectations in fiscal 2009, with more work expected to be done in fiscal 2010.

Gannett said he expects TEB’s level of productivity to increase, especially as the 42 new hires made by the office over the last several months bring its total workforce to over 100 employees.

“This year has been one of really unprecedented change and growth in the program,” he said. “We’ve had substantial expansion in our responsibilities and workload.”

“It’ll be interesting to see what the result of the growth in the number of agents is,” said Thomas Vander Molen, a partner with Dorsey & Whitney LLP in Minneapolis. “It certainly gives the service a lot more ability to do more exams, more initiatives, and so forth.”

ARBITRAGE

Some of the IRS’ new hires already are being put on a new team that will be devoted to identifying areas in which the service should look into for arbitrage problems.

Steve Chamberlin, senior manager of TEB’s compliance and management program, said the team has been able to rely on expertise some of the new hires have developed in the private sector to aid the efforts.

“With so much expertise in our program ... we decided to take advantage of that and bring a cross-functional team together to meet periodically,” he said.

The team is charged with determining what types of transactions merit a closer look to ensure those types of deals are not earning illegal arbitrage.

The IRS plans next year to examine small issuers that have done variable-rate bond deals. The rationale, according to Chamberlin, is that these transactions often have a number of covenants and commitments that have to be met for the life of the bonds, and it is possible that some of them become neglected after the deal closes and the transaction professionals leave.

In addition, arbitrage compliance is more complex with variable-rate bonds because the yields are constantly changing.

Another focus in the arbitrage area will be lease financings, because the vendors of the leased equipment or facilities are often heavily involved in structuring the transaction and the issuer might not be as knowledgeable about arbitrage compliance on an ongoing basis, Gannett said.

“This year, we’re really focused on putting out some quality initiatives that really identify areas where we think there could be problems in the arbitrage area,” he said.

BUILD AMERICA BONDS

Probably the biggest single responsibility Gannett’s office has had to take on this year is implementing, processing, and disseminating the direct-subsidy payments for taxable Build America Bonds. With more than $63 billion of BABs issued this year, TEB has had its hands full.

However, the IRS hopes to address a major issuer concern regarding BAB payments sometime next month, when it unveils a new and improved Form 8038-CP, which issuers have to file with the IRS to request a direct payment. The new form will include an option for issuers to request the payments be directly deposited into the bank account of their choosing.

TEB wanted to include the direct-deposit option on the original form, but IRS programmers needed time to develop a system to handle it, Chamberlin said.

Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center, said GFOA members are “very much looking forward to the electronic subsidy payment system being implemented,” compared to the current system where the IRS mails paper checks to issuers.

BAB issuers also can expect to receive a compliance check questionnaire from the IRS. They will be sent to every BAB issuer, and although compliance-check protocol stipulates that the IRS can follow up with an audit, TEB officials say the main goal of the outreach is education.

“It’s educational, to try to generally map out what the issuers should be thinking about,” Gannett said.

The questionnaire will not be as extensive as others the IRS sent to charitable and governmental issuers during the last two years, according to Gannett.

It will focus on highlighting “the key tax-law differences [between] direct-pay BABs as opposed to other governmental financing options,” Chamberlin said.

The IRS’ findings from its most recent set of post-issuance compliance questionnaires — which were sent to 200 governmental issuers — should be released between April and June, he said.

However, IRS officials said they are disappointed at the high non-response rate, especially when compared to rate of some 207 charities surveyed the year before.

Just 87% of the governments surveyed responded to the IRS questionnaire, compared to 98% of the charities.

“That’s pretty significant, and is potentially indicative ... as to how [governments] view post-issuance compliance,” Chamberlin said. Furthermore, initial indications show that a “significantly lower” percentage of governments than charities have written procedures to ensure post-issuance compliance, he said.

Gannett has said the governments that did not respond can probably expect a closer look from the IRS in the form of an audit.

TRAINING

The IRS also is in the process of completely revamping how it trains new TEB field agents. Robert Henn, senior manager of field operations, said the office has established a training task force at the beginning of the month that will be looking at how to overhaul the training process.

“What can we do to create the ideal training for tax-exempt bond agents?” Henn asked. “What can we take from our existing training, put it into the new training, but also, what do we need to add?”

The bond branch will likely be offering more extensive training to future hires, said Henn, who hopes to receive and implement the task force’s recommendations by the end of September.

Another area where issuers should feel the impact of TEB’s new hires is the voluntary closing agreement program.

Chamberlin said that more than 20 staff members are principally working on VCAP, compared to only four or five a year ago.

The new hires allow the service to devote two tax-law specialists to every case “in order to make sure that case is moved through as expeditiously as possible,” he said.

“We have a larger workforce,” Gannett said, referring to TEB overall. “We’re going to do a mix of our routine work ... as well as we’re going to do a number of projects that are intended to strengthen our program long-term.”

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