Attorneys and tax-exempt bond holders are dealing with a spate of notices from the Internal Revenue Service incorrectly informing them that their Forms 8038 are being filed without the required signature.
"The IRS is aware and is working on the issue," said Barbara League, a partner at Orrick. "At this time, they have no estimated timeline during which it will be resolved."
According to the National Association of Bond Lawyers, Form 8038 is "required to establish and maintain the federal income tax-exempt status of the Interest on Tax-Exempt Bonds. In most cases, this will be either an IRS Form 8038-G for Governmental Bonds or Governmental Purpose Bonds or an IRS Form 8038 for qualified Private Activity Bonds."
The notices have been flowing out of the IRS for reasons that remain unknown. According to Orrick, "this issue, which has persisted for several months, appears to be escalating in frequency, causing confusion and concern among bond issuers and their legal advisors."
The erroneous notices suggest that the form was submitted without a signature, a critical error that could jeopardize the bond's tax status and result in substantial fines for late filing.
The notices often refer to time periods that can't be matched to any specific return. Many of the affected issuers routinely file multiple 8038s within a given time period.
The attorneys trying to untangle the confusion believe the notices indicate a systemic error on the part of the IRS.
According to Orrick, "Efforts to resolve the issue have proven challenging. Issuers and bond counsel have attempted to contact the IRS using the customer service number provided on the notices but have found little success resolving their issue."
Customer service levels at the IRS became a political football when the Biden administration boosted the agency's budget with an $80 billion infusion via the Inflation Reduction Act. More than half the money was earmarked for enforcement aimed at catching wealthy tax cheats.
Part of the budget increase was clawed back during the debt ceiling negotiations of 2023, while House Republicans flirted with more cuts in
Tax attorney's practicing in the muni world equate higher IRS budgets with a greater chance of audits.
The Trump administration has indicated a desire to reduce the agency's workforce by 40,000 through a combination of voluntary incentives and layoffs.
About 7,000 probationary employees who were fired in February were given the option to return to their jobs last week following an extended preliminary injunction by a federal judge.
Bond lawyers currently working on the 8038 issues indicate that the IRS representatives acknowledged awareness of the issue and requested the patience of the bond community while its works towards a resolution.
Orrick is advising issuers who receive an IRS notice stating that their Form 8038 or Form 8038-G was received without a signature should "send the notice to their bond or tax counsel for assistance responding to the notice (or not)."
The IRS did not respond to a request for comment.
