WASHINGTON – The Internal Revenue Service's Office of Tax-Exempt Bonds recently released two model closing agreements, one for the general examination program and one for the Voluntary Closing Agreement Program.
The model agreements, posted on the IRS website last week, are designed to expedite and increase the consistency of closing agreements for tax-exempt bonds.
TEB has seen significant staff cuts and, as a result, a steep reduction in audit counts in recent years.
Rebecca Harrigal, the director of TEB, said during the National Association of Bond Lawyers' Tax and Securities Law Institute here last week that she expects TEB to lose seven employees this calendar year, as well as another three during the fiscal year, which would put the total staff at close to 60 people.
The department completed 568 examinations in fiscal 2015 compared to 1,000 three years ago, Harrigal said. The number of examinations done in 2016 is going to be "pretty close" to that of last year, she said.
"The reality is with fewer employees we're going to do less work," Harrigal said, while also cautioning against the analysis of "pure numbers." "Efficiencies only take you so far," she said.
Because the model closing agreements are still less than a week old, several attorneys said Monday that they had yet to review them in detail and declined to comment on their potential impact.
The model agreements are similar in some respects and the IRS has provided a summary explanation of their key paragraphs.
The agreements use, as an example, a case where a facility financed with 501(c)(3) bonds was sold to a private entity or someone other than a state or local government or nonprofit organization and therefore violated the tax-exempt bond provisions of the federal tax code.
The IRS makes clear the agreements would be changed somewhat for other violations. Harrigal also reminded bond lawyers that penalties generally would be smaller under the VCAP model agreement, which issuers use to voluntarily report certain violations
Tom Vander Molen, a partner at Dorsey and Whitney in Minneapolis, told The Bond Buyer Monday that IRS agents have been using uniform closing agreements for some time, but that this "memorializes them."
Harrigal said at the NABL meeting that efforts to streamline the agreement process date back to 2014 when the IRS first considered revising its model closing agreements.
Harrigal said a goal of both the audit and VCAP closing agreements is to avoid explicitly stating a violation, and rather provide enough evidence to make clear that there was one.
"What you will see [is that the model agreements state] that the IRS has the basis to conclude there is a violation," Harrigal said. "There is no need for the issuer to come in and say there is a violation."
Vander Molen said he is glad the agreements see the "basis to conclude" language rather than the statement that there is a violation.
He also said he is glad to see that the agreements include the conduit borrower as a signatory to closing agreements for conduit deals.
Still, Vander Molen said there are several recommendations he plans to make to Harrigal, including in the first paragraph of the model agreements, which refers to a contemporaneous wire of the resolution amount.
"Literally, the execution and the wire transfer are never contemporaneous," Vander Molen said. "Typically they are on the same day. What should be important to TEB is that the closing agreement is not sent to the IRS before the wire transfer has been ordered."
He also said the IRS does not go far enough by saying the bondholders will not be required to report the interest as taxable. If the issuer has taken remedial action, he said, the agreement should make clear that the violation has been cured.
For the regular VCAP program, Harrigal said issuers complete both the VCAP model closing agreement and submission request, attach a check and mail them into the IRS.
"Basically, you're done unless there's a problem," she said.
