Looser disclosure rules would allow the Internal Revenue Service's tax-exempt bond office and the Securities and Exchange Commission to more effectively enforce federal tax and securities laws, according to IRS officials.
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Audits of tax-exempt bond deals often raise additional questions about material events disclosure and the accuracy and completeness of offering statements -- issues that are often intertwined with tax-exemption issues, agency officials say.
And while Section 6103 of the federal tax code prohibits the IRS from making unauthorized disclosures of tax information, it also hinders tax-exempt bond enforcement activities and securities regulation, and keeps important information from investors, they say.
The IRS' inability to communicate fully with the SEC has been a discernible problem for years, according to Charles Anderson, field manager of the IRS' tax-exempt bond office.
The IRS will have issued about 100 adverse determination letters by the end of the year, Anderson estimated yesterday. Preliminary and proposed adverse determination letters inform issuers that the IRS believes certain series of its bonds are not tax-exempt.
About 25 of this year's 100 letters have been disclosed to investors via the nationally recognized municipal securities information repositories, which post material events notices, but the IRS cannot tell the SEC about the other 75 deals it considers problematic, Anderson said.
Additionally, if the SEC contacts the IRS' tax-exempt bond office about an investigation of attorneys who appear to have given unqualified opinions after being told that they needed to obtain a private letter ruling first, the IRS cannot confirm that it is conducting an examination of the deal, he said.
Or, Anderson said, if a bond lawyer or an underwriter agrees to IRS-imposed penalties under Section 6700 of the tax code, which seeks to penalize participants in abusive transactions, the IRS cannot give the SEC that information.
Issuers are often given the opportunity to sign Form 8821, a disclosure waiver that enables the IRS to communicate directly with the SEC.
"In a lot of cases it has helped resolve problems," Anderson said, citing the first group of yield-burning examinations as a good example.
"It's not that common, but it comes up ultimately when the issuers realize that the only way they're going to get their problems resolved is to allow the IRS and the SEC to address the parties that dragged them into the deal," he said. "I think the issuers find it's really to their benefit to [sign the waiver]."
But if the IRS could correspond directly with the SEC, it would not have to put issuers into that predicament, Anderson said.
Congress would have to create a formal exception to Section 6103 of the tax code to open the lines of communication between the two agencies. The IRS and Treasury Department could make a legislative recommendation to that effect but any formal change would have to come from Capitol Hill, according to tax-exempt bond office director W. Mark Scott.
While Section 6103 is "very necessary" and prevents unauthorized disclosures of tax information "for very good reason," an exception allowing the IRS and SEC to communicate on tax-exempt bond and securities enforcement activities would allow for more efficient regulation, Anderson said.
"Most of the disclosure rules prohibit disclosures against individual parties," he said. "With bond issues, the reality is that it doesn't hurt investors; it helps [them]. It's not [as if] we're disclosing the names of the investors; we're just disclosing information about the public offering of securities."
While the lack of disclosure hampers federal regulators, it is a bigger problem for investors, Anderson said. "For investors who rely on the tax opinions -- this is really hurting them," he said. "How can you call for transparency in the market when the government entities that regulate it don't have transparency between them?"
Scott noted yesterday that investors appear to prefer to have as much information as possible about the municipal securities they purchase.
He also predicted that if more information about tax-exempt bonds were disclosed on a regular basis, the impact of such disclosures would diminish.
"Because there's such a scarcity of information out there, even with respect to ongoing audits that have reached preliminary or proposed adverse stages, when that kind of information is released it seems to have a potentially bigger impact than it would otherwise, have if all the information had been released," he said.
Scott also said that while in many cases disclosure does impact the yield and marketability of tax-exempt bonds, those changes are "appropriate market adjustments as opposed to a market disruption.
"If some of these risks had been disclosed up front, there would not be an additional adjustment because of the activities of the Internal Revenue Service," he said.
Anderson and Scott's comments came the day after IRS Commissioner Mark W. Everson testified before the Senate Homeland Security and Government Affairs committee's panel on federal financial management, government information, and international security.
While Everson did not explicitly address tax-exempt bond audits in his prepared remarks Wednesday, he did indicate to members of the subcommittee that relaxed disclosure rules, in general, would aid his agency in enforcing federal tax laws.
He also testified that discouraging and deterring noncompliance among tax-exempt and government entities, and the misuse of such entities by third parties for tax avoidance purposes, was one of the agency's top enforcement priorities. (c) 2005 The Bond Buyer and SourceMedia, Inc. All rights reserved. http://www.bondbuyer.com http://www.sourcemedia.com
