IRS to Focus on Abusive Transactions; Reallocate CREBs

The Internal Revenue Service’s tax-exempt bond office published its fiscal year 2013 work plan, saying it will continue to focus on identifying and responding to abusive transactions.

TEB will focus on pricing manipulation or false certifications relating to investments, hedges or bonds. The office will use civil penalty examinations under section 6700 of the federal tax code and other statutory authorities on transaction participants or other parties involved in the abusive matters, the plan said.

TEB will also continue to participate in ongoing investigations of arbitrage-motivated or other abusive transactions in collaboration with IRS criminal investigations, it said.

Bond lawyers here at the National Association of Bond Lawyers’ 13th annual Tax and Securities Law Institute noted that the six-page work plan is significantly shorter than previous plans and that the market segment list changed.

Market section examinations will focus on governmental bonds, qualified 501(c)(3) bonds, qualified small issue bonds, various exempt facility bonds including airports, solid waste and sewage, various disaster relief bonds, Build America Bonds and qualified school construction bonds, according to the plan.

Arbitrage-focused examinations will cover various market sections including advance refunding bonds, notes, student loan bonds, as well as rebate payment verification and other examinations of Form 8038-T, the form on “arbitrage rebate, yield reduction and penalty in lieu of arbitrage rebate” that issuers must fill out and submit if applicable.

“The work plan itself is more direct in emphasizing particular areas of focus as well as highlighting our efforts to coordinate exam, compliance, outreach and training efforts,” Todd Mitchell, group manager with the TEB compliance and program management, told bond lawyers on an IRS enforcement panel.

Rick Ballard, partner at Ballard Spahr, also a speaker on the panel, said TEB’s work plan makes sense to him.

“In some very realistic ways the work plan shows the effort of the government to look at the same things we are looking at, tax sensitive areas,” Ballard said. “We can hardly complain or be surprised that if the tax administrators are interested in the same transactions for the same reasons.”

CREBs

In coordination with the Treasury Department and the IRS’ chief counsel, TEB will issue guidance describing a new process for allocating unused volume cap authority to issue new clean renewable energy bonds.

CREBS are taxable bonds that can be issued either as direct-pay or as a tax credit bonds. CREBs are used by state and local governments, as well as public power providers and electric cooperative companies to finance renewable energy projects. Their subsidy payments are equal to 70% of interest costs.

Similar to July 2012 when the IRS overhauled its tribal economic development bond allocation process and reallocated $1.8 billion of available bond cap, the new CREB process will emphasize the allocation of volume cap authority to issuers who demonstrate a readiness to timely issue bonds to finance projects.

Processing requests under the voluntary closing agreement is a high priority assignment for TEB, including working through those requests relating to student loan bonds. Last week, TEB issued a new checklist form that issuers must fill out if they want to participate in the VCAP.

TEB also said that direct-pay bonds present a unique compliance and fraud deterrence risks that “require heightened levels of review.” TEB is developing internal revenue manual examination procedures for direct-pay bonds.

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