CHICAGO - The Internal Revenue Service's tax-exempt bond office is modifying its market-segment approach to audits, the office's director, Rebecca Harrigal, said.
Harrigal spoke here at two panel sessions about IRS enforcement at the National Association of Bond Lawyers' annual Bond Attorneys' Workshop.
Under the prior market segment program, different categories of bonds were identified, and IRS agents would conduct random audits of bonds within those categories. The goal of the approach was to make sure a variety of types of bonds were being audited and to figure out if there were areas where there were greater risks of noncompliance, Harrigal said.
In the revised market segment program, TEB is coming up with hypotheses for different segments about areas where there may be greater risk of noncompliance that can be identified from the 8038 forms and public databases. It will then do audits in sub-segments of the bond categories to test those hypotheses, she said. For example, there used to be an advance refunding segment, but now there may be five or six advance refunding sub-segments.
If TEB finds that there is in fact an area where there is a greater risk of noncompliance, it may take actions such as providing more education, setting up standard settlement resolutions or doing more focused examinations in that area. The long-term goal is to have the compliance rate in the area to return to the norm, Harrigal said.
The revised approach is in line with Harrigal's goal of making sure that TEB is devoting its limited resources to the highest priority issues.
TEB is in the world of doing "less with less," Harrigal said. Over the past several years, TEB has gone from having about 120 employees to having about 80. The office is also trying to standardize as much as it can "so we're not trying to reinvent the wheel," she said.
The office is restarting its program to survey issuers about compliance, and Harrigal said she hopes they can use the surveys to delve into noncompliance in some circumstances instead of audits.
The Internal Revenue Manual's section on the voluntary closing agreement program is being reworked so that there is more objectivity. The revisions are pretty close to being finished, Harrigal said.
As part of the update to the manual, which is used by TEB agents, the office is looking at the role that post-issuance compliance procedures should play in VCAPs and how the form and substance of procedures should be taken into account, Harrigal said.
Chas Cardall, a partner at Orrick, Herrington & Sutcliffe in San Francisco and moderator of the panels, said that currently, the IRM provides a good amount of detail about what appear to be good elements of written post-issuance compliance procedures.
Harrigal said that TEB has anecdotally found that written procedures are beneficial, but she is concerned that people will have procedures just so they can say they have them. She is focused on the effectiveness of the procedures and wants to make sure that the IRM gives issuers enough flexibility to develop their own best practices. The IRM may be revised to state that an issuer can't get a settlement until it shows that it has done something to prevent the violation from happening again. If an issuer repeats the violation because the preventative procedures didn't work, the IRS won't necessarily prevent the issuer from getting another VCAP, but will want to discuss the procedures, Harrigal said.
It appears that there will be about 55 to 60 settlements under VCAP in fiscal 2014, which ends on Sept. 30. TEB is increasing its emphasis on completing settlements that are outstanding, and Harrigal said she thinks VCAP requests are starting to be processed more quickly.
During the first session, Mike Bailey, a partner a Foley & Lardner in Chicago, said that in the past many issuers have asked for technical advice memorandums from the IRS chief counsel's office when there is a dispute during an audit, but that the IRS field agents have turned down the requests. As a result, there have been fewer requests for the advice.
Harrigal, who used to work in the chief counsel's office, said she doesn't have a problem going to that office and doesn't know why the technical advice requests have been rejected in the past.
Tom Vander Molen, a partner at Dorsey & Whitney in Minneapolis and one of the panelists at the second session, said that NABL members individually sent the IRS informal comments on the VCAP IRM and may send some more. NABL is planning to send the IRS formal comments on IRM procedures for audits of tax-advantaged bonds and technical advice requests, he said.
TEB did three webcasts over the past few months, and attendance grew with each of them. The first had an audience of about 400, the second had an audience of 700 and the third had an audience over 1,100, Harrigal said. "It sounds like we might be doing something right there, and the webcasts will continue to be an important part of our outreach program next year," she said.
Harrigal also noted that there have been recent personnel changes in TEB. Bob Griffo is now acting senior manager of field operations, which handles audits, and Karen Skinder is now acting senior manager of compliance and program management, which handles VCAP.
