BONITA SPRINGS, Fla. -- One consequence of the computerized approach the Internal Revenue Service has been using to select tax audits of bonds is it that some of those examinations are begun erroneously.
When that happens, Telley Meier, IRS field operations manager for the Indian Tribal Government/Tax Exempt Bonds office, advises bond attorneys to call the examination agent.
“If you think your exam has been opened erroneously, then I would urge you to right away contact the agent and work up the chain to the manager, to let us know,” Meier told attorneys attending a National Association of Bond Lawyers conference here.
Examination agents recently have been given more flexibility than they have had in the last couple of years. “We want to empower agents to do really good exams,” Meier said. “We have seen a shift back to them taking a more active role.”
But declining staffing levels at the IRS over the last several years have served as an impetus for the service to switch to a computer driven approach to audit selection.
The number of auditors assigned to tax exempt bonds has shrunk to 20 compared to 60 agents in 2009.
Meier said his group does not select which bonds are audited. “We are not building the workload or selecting the exams,” he said.
Bonnie Harrison, assistant to the IRS director for Government Entities/Shared Services told bond attorneys during a discussion on tax enforcement that the computerized data analytics selection process is being used as an efficiency move. “We need to rely more on technology,” she said. “We need to keep our focus on non-compliance. But we are also looking to increase voluntary compliance.”
Former IRS official Bruce Serchuk of Nixon Peabody in Washington, who moderated the panel discussion, advised attorneys against sending documents to the IRS if they think an audit has been erroneously opened.
“As I understand it, as soon as you start sending documents in, it makes it very, very difficult for the IRS to look at the case and say, wait, that shouldn’t have been opened,” Serchuck said.
The IRS expects to close 500 audits in its Tax Exempt Bonds office in the current fiscal year, up slightly from 480 in the 2018 fiscal year that ended Sept. 30.
IRS auditors plan to focus on excessive cost of issuance for private activity bonds, defeasance, and public safety or jail bonds.
The public safety bond audits have focused on facilities financed with tax-exempt bonds that now house federal prisoners under contacts with federal agencies. The federal government is considered to be a private party under the federal tax code, which means that prisons or detention facilities that are used for federal prisoners or detainees are considered to be under a private use.
Thomas Vander Molen at Dorsey & Whitney in Minneapolis, offered this audit advice: “If you have a county jail owned and operated by the county with no management contract and no federal prisoners, you can call the agent and get rid of it pretty quickly.”
Meier said the IRS compliance strategy can, however, change during the course of a fiscal year. “Strategies are fluid,” he said, noting that a strategy that isn’t yielding results can be put on the shelf or a new strategy may emerge.
Last year the 2018 IRS work plan for the division included hedge terminations; economic life and weighted average maturity (WAM); safe harbors for guaranteed investment contracts; and rules for qualified hedges.
The IRS TEB office does not make forecasts of how many cases will be settled under its voluntary closing agreement program (VCAP) for tax-exempt and other tax advantage bonds. But VCAP settlements have been on the decline, falling to 27 cases in fiscal 2018 from 44 in the 2017, 67 in 2016 and 122 in 2015.
There are new minimums on settlements of $5,000 for audits and VCAP is $2,500. “In the past there have been VCAPs with lower numbers on them,” said Thomas Vander Molen at Dorsey & Whitney in Minneapolis.
