Government shutdown halts muni tax audits, VCAPs

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WASHINGTON -- The partial shutdown of the federal government has halted Internal Revenue Service tax-exempt bond audits and negotiations under the Voluntary Compliance Agreement Program.

It’s also unclear if monthly federal subsidy payments on Build America Bonds will be made. IRS officials who might answer that question have been furloughed.

One example of the halted work involves a VCAP agreement that was supposed to be finalized last week and will now be postponed until a week or two after the shutdown ends.

“It’s pushing the resolution probably by at least a month,” said Mattias Edrich, a tax partner at Kutak Rock in Denver who is handling the case.

“We are all done with the VCAP,” Edrich said. “We have all the settlement terms negotiated, but because the agent isn’t in the office and his or her managers aren’t in the office, the final sign-off can’t be given.”

For the borrower, the delay means paying additional late interest.

Edrich also is handling an unrelated audit of tax exempt bonds that is in the early stage. “The borrower was told to provide a response within three weeks, which can be a typical deadline, and often it’s customary to ask the agent for a short delay,” Edrich said. But because of the furlough he said there’s no one at the IRS for him or his client to ask at the IRS for a delay to compile the additional data.

“The agents are not in the office so there’s no way to contact them for approval of a delay,” he said.

Treasury and IRS officials announced Monday that tax returns will be processed beginning January 28 and refunds will be sent out as scheduled.

BABs subsidy payments might or might not be treated by the IRS as tax refunds.

“We are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown,” IRS Commissioner Chuck Rettig said in a press statement.

The IRS said it will “be recalling a significant portion of its workforce currently furloughed as part of the government shutdown.” The IRS FY2019 Lapsed Appropriations Contingency Plan covering the period that ended Dec. 31 called for furloughs for 88% of its of its 79,366 employees, leaving on 9,492 essential workers still working.

The IRS said that “although in 2011 the Office of Management and Budget (OMB) directed the IRS not to pay refunds during a lapse, OMB has reviewed the relevant law at Treasury’s request and concluded that IRS may pay tax refunds during a lapse.”

House Ways and Means Committee Chairman Richard Neal, D-Mass., said he was informed of the plan Monday in a call with Rettig of the IRS and Treasury Secretary Steve Mnuchin.

“I look forward to seeing a more detailed description of how the agency will carry out these operations, particularly what will be expected of Treasury and IRS personnel,” Neal said in a press statement. “These developments are no substitute for funding the government and fully reopening these agencies.”

The IRS may address the issue of BABs in the update contingency plan for the tax filing season it will issue in the next few days.

The IRS shutdown could end later this week if Senate Republicans and President Trump agree to carve out 2019 funding for Treasury, the IRS and other financial services from their dispute over funding a wall on the southern border.

House Democrats were planning a Wednesday floor vote on 2019 funding for financial services, pointing out that the Republican-controlled Senate approved the same bill as part of a larger funding bill last year by 92 to 6.

Once the bill passes the House, Neal urged the Senate to “move the legislation swiftly to President Trump’s desk for his signature.”

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Tax-exempt bonds Tax planning Tax audits Build America Bonds IRS Treasury Department Washington DC
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