BAB Subsidy Payments Going Smoothly: Report

WASHINGTON — The vast majority of early Build America Bond subsidy payments were processed in a timely and accurate manner during the first five months of the program, with no evidence of fraud or errors, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, was dated July 14 but not publicly released until this week. It analyzed 80 subsidy payment requests from BAB issuers totaling over $110 million that the Internal Revenue Service received from May through September 2009.

The IRS made all but one of the payments within the 45-day window from receipt of the request that it had established.

The Treasury watchdog’s findings mark the second piece of good news about the BAB program in recent days. Assistant Treasury secretary for economic policy Alan Krueger told treasurers meeting in Williamsburg, Va., that the IRS had found less than 1% of all BAB payments made thus far have been reduced to offset money an issuer owed the federal government.

Although most fixed-rate municipal bonds pay interest every six months, many issuers that sold BABs during the five-month period studied by TIGTA had to request their subsidy payments during that time.

For fixed-rate BABs, issuers must file their payment request form at least 45 days and not more than 90 days before they make interest payments.

The IRS makes the subsidy payment on the date the issuer pays interest. Issuers of variable-rate bonds receive payments from the IRS on a quarterly basis, based on the interest they paid during that quarter. They must file payment requests 45 days after their last interest payment during the quarter.

The TIGTA study found that the IRS has measures in place to ensure BAB payments are going to the correct recipients, even if they do not go to the issuer. BAB issuers received direct payments for 54 of the 80 payments made during the five-month period, but told the IRS to send the rest to third parties.

Of the remaining 26 payments not sent to issuers, 22 were sent to trustee banks charged with making the issuer’s interest payments, and the remaining four went to a different office within the same government that issued the bonds.

TIGTA also recalculated all of the BAB payments made by the IRS and found they were correct. In two cases, the issuer had incorrectly calculated its bond interest when determining payment, and IRS personnel contacted the issuers before making the corrections.

In another case, a number was ­transposed on the payment request form, which was corrected by the IRS computer system.

The IRS also was successful in meeting its standard for making payments within 45 days of when it received a request. All but one of the payments were made in a timely manner, although eight payments were delayed due to issuer errors on their request forms that had to be corrected.

In the case of the single outlier, the IRS computer system rejected the payment request as a duplicate. IRS employees manually processed the payment after they discovered it was not a duplicate, but the payment was not made until 53 days after the IRS received the request. However, since the service did not meet its deadline, it paid interest to the issuer for the eight days it was overdue, TIGTA said.

The Treasury watchdog also analyzed the payments for any evidence of fraud or mistakes and found none. It noted that the processes the IRS has in place to verify issuer information and where payments are headed before they are made reduce the risk of fraud.

For example, the 10 payment requests that the IRS processed manually had an increased risk of fraud since an IRS employee could change the payee information for personal gain. To prevent this, the agency requires a manager to approve all payments. In addition, its computer system tracks manual processing and manual payments are reviewed randomly for accuracy and appropriateness.

TIGTA’s findings could assuage ­concerns about prompt payment from the IRS, while Krueger’s comments Monday were an attempt to deflect criticism about the fact that BAB payments can be offset due to money issuers owe the federal ­government.

Krueger told the National Association of State Treasurers that 0.85% of all state and local BAB payments have been offset for tax purposes and that the Obama ­administration is committed to getting Congress to extend the BAB program beyond its year-end expiration date, even if that means a lower subsidy rate.

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