The Internal Revenue Service plans to release more streamlined resolution standards in October that provide penalties for certain types of bond-related tax violations that issuers report under the IRS' voluntary closing agreement program.
The standards will become part of Section 7.2.3 of the Internal Revenue Manual used by IRS agents and will take effect upon their release. The IRS will use these standards for recommended penalties if issuers that qualify for the VCAP request them. If an issuer in the VCAP thinks a more lenient penalty should apply than the standard one, it can request this. But any other penalty than the standard one would have to be approved by IRS senior management.
"Many of the streamlined standards evolved from fact patterns we commonly encounter in VCAP requests and for which consistent resolution methodologies have been approved through the regular VCAP approval process," said George Gurrola, a tax-law specialist for the IRS tax-exempt bond office. "As we develop these types of consistent approaches to commonly encountered violations, we expect to include additional resolution standards over time."
The IRS plans to add four new resolution standards under the VCAP, two of which pertain to violations under the Tax Equity and Fiscal Responsibility Act of 1982. TEFRA generally requires issuers of private-activity bonds to give notice, hold a public hearing and get approval by an applicable elected representative before issuance.
One of these two new standards applies to issuers that do not realize current refundings, but not advance refundings, of PABs qualify for an exception to the public approval process. The standard penalty generally will be a payment of 7.5% of the taxpayer exposure from the issue date to the date of the closing agreement, according to the IRS. Also, the issuer would have to fulfill all its TEFRA obligations.
The second new TEFRA-related standard pertains to issuers who mistakenly rely on approval from someone who is not an applicable elected official. In this case, the issuer would generally make a payment of 5% of taxpayer exposure from the issue date to the date of the closing agreement, the IRS said.
A third new resolution standard would apply to issuers of draw-down bonds, which are small-issue, private-activity bonds. Draw-down bonds typically provide a way for smaller issuers to finance construction projects with bonds without having to make initial interest payments on the entire issue. The issuer places the bonds with the bank and the bank then lends the bond proceeds to the issuer in several small periodic amounts. The issuer is only obligated to pay interest on the amounts that have been tapped.
This resolution standard is intended for issuers who go over their volume cap in years when they made draws because they were relying on the cap for the year of issuance. Volume caps are based on when issuers make draws, not when the bonds are issued. Generally, the issuer would pay $1,000 for each calendar year after the calendar year of the initial draw, the IRS said.
The fourth resolution standard would apply to an issuer makes an attempt to remediate a violation under existing U.S. Treasury regulations but fails to file a 8038 series information-reporting form at the end of the remediation process. If the failure to file the return is not addressed, the underlying remediation could fail, according to the IRS. The issuer would have to pay $1,000 when it submits a request to resolve the violation within six months of the due date for the relevant 8038 return, the IRS said.
The IRS also plans to take its existing resolution standard concerning de minimis premium violations for direct-pay bonds and split it into two. One standard will apply to certain specified tax-credit bonds, and the other will apply to Build America Bonds and Recovery Zone Economic Development Bonds.
Under tax law, issuers are not permitted to issue BABs or RZED bonds with more than a de minimis amount of premium. The IRS plans to extend to Oct. 1, 2014 the date an issuer can submit a VCAP request for BAB and RZED de minimis premium violations. The penalties will be slightly higher, the IRS said, noting that these violations can be identified at issuance, these types of bonds haven't been issued since 2010, and issuers are to be encouraged to identify and solve violations soon after they are committed.
