WASHINGTON — Bond lawyers praised an Internal Revenue Service proposal late last week that would eliminate requirements for state and local bond opinions under its Circular 230 rules, which governs written tax advice.
It would definitely be good if the proposed Circular 230 practice standards regulations went into effect, John Swendseid, a bond attorney with Swendseid & Stern, the Nevada arm of Sherman & Howard, and chair of the American Bar Association’s taxation section, said after their fall meeting in Boston.
“This will put tax-exempt bonds and everything else on the same standards,” Swendseid said.
The proposal would provide a single, basic new standard governing all written tax advice. The IRS said in its proposal that it abandoned earlier, more complex standards which had covered tax-exempt bond opinions, because compliance was difficult and costly.
Circular 230 regulations were intended to govern opinions used in tax shelters and abusive transactions. State and local bond opinions were exempt from the rules until December 2004, when a new set of proposed regulations were introduced.
The final Circular 230 regulations went into effect in June 2005 — called Section 10.35 — and set forth standards for “covered opinions” issued by tax practitioners.
Muni market groups had lobbied the Treasury Department and IRS for more equitable treatment of the tax-exempt bond market, claiming the rules unfairly burdened bond lawyers by requiring them to write lengthy memos accompanying bond transcripts discussing the tax rationale of their opinions.
As a result, state and local bond opinions were exempted from those rules on an interim basis.
“I know it’s difficult to get regulations out and we really appreciate clarifying some of the issues that have arisen even since the 2005 notice,” said Linda Schakel, a partner with Ballard Spahr.
Separately, Bob Henn, acting director of the IRS tax-exempt bond office, briefly outlined the agency’s work plan for the remainder of this year and 2013 at the committee meeting. While the 2013 IRS work plan has not been finalized yet, market participants can expect continued quick turnaround on rebates and refunds. “The agents are trying to turn them around in 100 days and issue a refund,” Henn said.
The IRS will continue examinations through October on filed 8038-T forms, which issuers must file this form if they have to pay rebates on their bond issues.
Public safety bonds will be an area of emphasis next year for TEB, Henn said. Public safety bonds have been part of the IRS’ risk assessment exams in the past year. “That process has helped us identify where there are areas of noncompliance and that is one area where there is noncompliance,” he said.
There will also be governmental, advanced refundings and 501(c)(3) examinations in 2013. TEB will continue auditing small-issue bonds because they are taxable and have a very high non-compliance rate, Henn said.
TEB will issue compliance check sheet questionnaires next year for 501(c)(3) and governmental bonds and compare them to when they were first issued five or six years ago to see what has changed, he said.
Finally, Henn said that TEB’s compliance-practice research team has completed a draft white paper that identifies red flags for issuers, circulated the document internally and received comments on it. While they haven’t shared the document for input and reaction from groups like the ABA and the National Association of Bond Lawyers, they “are moving in that direction,” he said.
Meanwhile, James Polfer, chief of the IRS’ Branch 5, financial institutions and products office of chief counsel, said that even though record retention is no longer on the TEB’s business plan, it is not off the table.
“TEB have been doing a lot of effort in subsequent years in providing outreach and guidance, although not necessarily in the form of precedential guidance to issuers about record retention,” Polfer told committee members.
Henn said that the TEB is looking at record retention and within the next year it’s likely the topic will be in the revised Internal Revenue Manual for agents.
David Cholst, partner with Chapman and Cutler, said even if the IRS doesn’t issue precedential guidance on record retention but includes it in a revised IRM, it would be of great value to bond lawyers because it would streamline the examination process.