BAB Issuer Responses Lead to Few Audits

WASHINGTON — The Internal Revenue Service has initiated very few audits of Build America Bonds based on issuers’ responses to the compliance check questionnaires sent to them last year, a Treasury Department inspector general said in a report released Monday.

The IRS’s tax-exempt bond office has not completed an ­in-depth review of the questionnaire responses or developed a longer-term compliance plan, and therefore cannot evaluate or address any high-risk indicator of noncompliance from the ­questionnaires, the report found.

“Until the IRS establishes formal guidelines for planning and conducting compliance check programs, TEB office management will not have assurance that their compliance-check programs will comply with the Internal Revenue Code or that useful information will be gathered to identify, evaluate and appropriately address indicators of potential noncompliance,” J. Russell George, the Treasury inspector general for tax administration, said in a release.

The report, “The Direct-Pay Build America Bond Compliance Check Program Has Yet to Result in Wide-Scale Examinations,” comes after Treasury officials asked the IRS more than a year ago to develop a plan to address possible risk of noncompliance associated with BABs.

TEB in early 2010 office mailed 375 compliance-check questionnaires to issuers who had issued BABs from February through September 2009.

The questionnaires asked about BAB pricing and record-retention policies and procedures, among other things.

The American Recovery and Reinvestment Act that created BABs stipulated that they not be sold at more than a de minimis amount of premium, mostly to ensure that the Treasury would not be making higher-than-appropriate subsidy payments to issuers.

If BABs are sold with too high a premium, issuers would not qualify to receive subsidy payments from the Treasury.

The questionnaires, which asked issuers if they or their consultants had tracked or reviewed the pricing of their BABs over the Municipal Securities Rulemaking Board’s EMMA system, caused a stir among issuers who feared their responses might trigger a flood of audits.

The report said the IRS’ questions to issuers “were appropriate for identifying indications of a high risk of potential noncompliance for BABs.”

“However, we could not evaluate the TEB office’s plans to address high-risk indicators because the ... office has yet to complete a detailed review of the compliance-check questionnaire responses and develop a longer-term compliance plan,” it said.

The IRS received 220 responses to the questionnaires.

IRS officials said last May that 70.4% of BAB issuers who responded to the survey said they had written procedures for determining whether their bonds stayed within the de minimis premium restriction. Most of them said they relied on the certificates provided by the underwriters or initial purchasers of the bonds to determine compliance.

While 71.4% knew their BAB trading was available on the Municipal Securities Rulemaking Board’s EMMA system, only 11.2% of them had reviewed their BAB prices.

In a response to the report, Joseph Grant, then acting commissioner for tax-exempt and government entities, told the inspector general: “We agree that TE/GE should publish new procedures for planning and implementing bond-related questionnaire projects. We accept your recommendation to publish such guidelines for the TEB compliance check program.”

In an attachment, Robert Henn, acting director of tax-exempt bonds, said the TEB office plans to publish new procedures for compliance checks in the Internal Revenue Manual for field agents and to implement them by March 30, 2012.

IRS officials did not immediately respond to requests for comment.

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