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Taxation

Henn Talks About IRS, Tax-Exempt Bonds and His Successor

NOV 28, 2012 6:04pm ET
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WASHINGTON — After 40 years at the Internal Revenue Service, Robert Henn will retire at the end of the year, but he has a “wish list” of projects he’d like to see pursued, including using the voluntary closing agreement program for student loan bonds as a model for other tax violations.

Henn, 63, acting director of the IRS’ tax-exempt bond office, will retire on Dec. 29. Based in Brooklyn, N.Y., he was promoted to his current post in May 2011, having served as a field manager for the office.

He will be replaced by Allyson Belsome, formerly Dodd, the group manager of field operations for the TEB office in Chicago who has rotated with other agents as acting field manager.

In a wide-ranging interview with The Bond Buyer, Henn reflected on his years at the IRS, ongoing changes in the TEB program, Belsome, and projects he’d like to see after he leaves. There are several items on his wish list.

He would like to see the voluntary closing agreement program that was created for certain tax-exempt student-loan bond issuers earlier this year used as a model for addressing other areas of noncompliance.

That VCAP program was applied to issuers who violated tax rules by reallocating student loans to bonds other than the ones used to finance them.

The issuers were trying to avoid having to make yield-reduction payments to the federal government.

About 15 student bond issuers submitted requests to enter into the VCAP program, IRS officials have said.

“We take a discreet market segment and find an issue on their exams and develop a resolution strategy,” Henn said. “We engage the industry, take that strategy for resolving field cases, and develop a VCAP program.”

“It is an effective model because it’s easier for both IRS officials and issuers,” he said.

“Rather than continue to do a whole bunch of examinations, we offer the opportunity to people if they have a problem to come in to us and resolve it.”

Another item on his list involves TEB’s case selection process. Henn believes it would be helpful for issuers to periodically file bond-related information forms over the life of their bonds.

“This would not only provide us with current information to evaluate in making a decision as to which cases we should be examining but I think it would also foster a sense of importance of post-issuance compliance,” Henn said.

However, he acknowledges any such change would likely be met with a backlash from issuers and is not something the agency can do without legislative authority from Congress.

Finally, Henn said he is disappointed that he will not see completion of the IRS’ effort to pursue Section 6700 investigations of firms and individuals that violated the tax laws by participating in schemes to rig the bids for guaranteed investment contracts, or GICs, and other contracts for municipal bond proceeds.

Section 6700 of the Internal Revenue Code allows the IRS to take enforcement action against any muni transaction participants who caused tax-law violations. Violators face fines of the lesser of $1,000 per bond denomination, typically $5,000, or 100% of the gross income derived from the activity.

The IRS initially investigated bid-rigging, then referred cases to the Department of Justice for criminal prosecution in 2005.

The DOJ launched a massive antitrust probe of the municipal market in 2006 that has since led to indictments and convictions of firms and individuals, as well as settlements.

Earlier this spring, three former executives of General Electric Co. affiliates were convicted of criminal charges for manipulating the award of GICs and other muni bond contracts from 1999 to 2006, defrauding issuers such as cities, towns and counties — as well as the IRS — of millions of dollars.

“I’m happy to be here and see what was started so many years ago from a referral from TEB actually come to the conclusion with the conviction and sentencing of three people and hopefully the future sentencing of more for really bad behavior,” Henn said.

The IRS suspended its Section 6700 investigations while the DOJ was pursuing cases, but it plans to restart some of them next year that the department has closed, he said.

Henn added that he will miss not being a part of those exams.

As the Justice Department concludes some of its actions, they release the records and notify the IRS that the records are no longer part of their criminal investigation.

As a result, the IRS is free to act on those investigations and pursue exams.

Henn said he is pleased to see ongoing improvements with the TEB office’s examination selection process. The office frequently evaluates and modifies the case-selection process and recently announced a new iteration for 2013.

The goal is to examine all of the market segments over a three-year period and carefully analyze the results from the examinations so that TEB has sound data to make future decisions regarding which bond issues have the highest potential for noncompliance, he said.

“This new approach also more thoroughly integrates both focused exams and full scope exams into a comprehensive examination program,” Henn added.

In addition, the TEB office will be using subject matter experts and dialogue between examiners to identify and implement effective audit techniques. The idea is to have more agents share information about exams to better identify noncompliance.

“This is to better utilize our limited resources and only examine those bond issuances that have a high potential for noncompliance and reduce the burden on the compliant issuer,” he said.

The IRS is trying to ensure there is a smooth transition from Henn to Belsome. It is unusual for the IRS to fill a position before an employee officially retires. However, because Henn’s position was vacant for more than a year while he was acting head of the TEB office, upper management decided to transition in Belsome before he leaves.

“She is inheriting a terrific program, and I think that one thing you have to realize is that you have to rely on the people that work for you,” Henn said.

“You probably don’t have all of the answers. Collectively, with all of those people you have, you do have the answers and collectively you can do a wonderful job.”

Henn expressed confidence that field operations will run smoothly under Belsome’s direction.

“She has been with the program since the beginning,” he said. “She is committed. She has had the experience of acting in the position before for periods of time, so she knows what it’s all about.”

Henn said it is the IRS’ dedicated workforce and common goal of enforcing tax laws that has motivated him to stay on the job for so long.

“You get a sense that you are making a real contribution to a market segment — it’s been very rewarding in that respect,” he said.

Henn, who hails from Long Island, N. Y., graduated from the University of Rochester in 1973 with a degree in political science and later obtained an MBA in accounting from Hofstra University.

He joined the IRS upon graduation and conducted personal income tax audits for three years. During his early career at the service, Henn was a revenue agent with the employee plans division starting in 1976.

He stayed in employee plans and eventually became the assistant division chief in what was called the employee plans/exempt organization division. When the agency reorganized in 2000, Henn became the Northeast area manager for employee plans.

After three decades with the employees plan division, Henn joined the TEB office in April 2007 as a field manager.

However, his arrival at TEB, which was created in early 2000, was met with criticism from numerous municipal market participants.

Chief among the criticisms was Henn’s lack of municipal bond experience. Henn admits that when he first arrived at the TEB office, it was challenging and he didn’t know what to expect.

“I had a steep learning curve on the technical side,” he said. “I was unfamiliar with the operations and the personnel.”

But the “intelligent and engaged workforce” of agents and managers in the TEB office made the transition easy and his colleagues were very supportive, he said.

Henn also went through the TEB training course, which he has since revised and updated, to get up to speed on the municipal bond market.

“Those who came before me had done an excellent job of launching the program in a market segment that had almost no prior IRS oversight, and they developed a very vigorous examination program that addressed noncompliance and serious targeted abusive transactions,” he said, adding that he hopes he was able to help the program mature.

One of the most significant accomplishments of the TEB office was in 2009 when Build America Bonds and general direct-pay bonds were first introduced to the market, he said.

The IRS needed to implement the direct-pay process to ensure that issuers received their payments in a timely fashion.

TEB also had to monitor payments to make sure they were only being made to appropriate parties and there was no fraud, he said.

Henn, an avid Syracuse University sports fan, knows precisely what he plans to do in retirement: volunteer with Literacy Volunteers, a national nonprofit group that provides English literacy programs to both American and international adults.

He also is looking to explore volunteer opportunities with the American Red Cross.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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