IRS announces 2020 tax compliance priorities
The top tax compliance and enforcement priorities involving municipal bonds for the Internal Revenue Service in the 2020 fiscal year are public safety and jail bonds, sinking fund overfunding and variable-rate bonds.
Those three priorities are contained in the IRS program letter for the Tax Exempt and Government Entities Division planned to publish late Wednesday on the IRS website.
TEGE Commissioner Tamera Ripperda told tax reporters in a conference call changes at the IRS over the last several years have been hard on the workforce and “may be disconcerting to the communities that we serve.”
“We are adopting the philosophy of looking forward,” said Ripperda. “So for fiscal year 2020 we are really looking forward with incredible focus on putting taxpayers first, improving compliance and modernizing TEGE as well as the entire IRS.” Achieving that includes getting out into the community to meet with tax-exempt entities and governments to find out ways to lessen the burden on those who use IRS services, she said.
Public safety and jail bonds were also on the IRS enforcement priority list for the 2019 fiscal year that ended Sept. 30, but the two other 2019 priorities — the excessive cost of issuance for private activity bonds and defeasance — have been dropped.
The jail bonds have been and are continuing to be a compliance priority because a significant number of municipal jails have signed contracts with the federal government to take in federal prisoners. Typically the prisoners are from the U.S. Citizenship and Immigration Service or the U.S. Marshals Service.
The jail bond audits usually involve a private activity bond problem. Significant private use of a jail for incarcerating federal prisoners is a violation of the tax-exemption for PABs.
At least several of the jail bond audits have been closed when the issuer self-corrects by redeeming the PABs and issuing taxable bonds as a substitute.
Sinking fund overfunding audits, according to the IRS, determine whether an overfunding causes the bonds to be arbitrage bonds, which negatively impacts their qualification as tax credit bonds.
“Even though direct-pay bonds are no longer authorized to be issued, there are still direct-pay bonds out there that have been issued and we continue to follow up and monitor the compliance of those interest payments as well as the administration of those bond issuances,” Ripperda said. “That’s why direct-pay bonds are still a part of our compliance plan because many have maturity dates going out many years.”
Eight audits of direct-pay bonds have been publicly reported in postings on the EMMA data of the Municipal Securities Rulemaking Board since earlier this year.
All eight involve public agencies in Puerto Rico, such as the Puerto Rico Buildings Authority and Puerto Rico Electric Power Authority.
Ripperda was asked Wednesday by The Bond Buyer if the audit initiative is broader than just the issuances in Puerto Rico.
“We are looking at the overall monitoring and compliance of direct-pay bonds,” she said in response.
The variable-rate bond audits determine whether the issuances comply with the rebate and yield restriction rules under Internal Revenue Code Section 148. It involves whether the bond and investment yields were properly computed and rebate or yield reduction liability, if any, was correctly determined.
Ripperda was asked if these audits have any connection to a series of lawsuits against major banks in the variable-rate demand obligation market.
She was unable to answer the question. “Not because I know the answer and I can’t share it, but I really don’t know,” Ripperda said.
To improve compliance, Ripperda said TEGE hopes to improve its case selection through the use of data analytics and modernization that includes more digitization of records and expanded use of secure electronic communication.
The secure communications initiative launched in May 2018 in the tax exempt bonds unit is continuing in fiscal 2020.
“It basically provides a secure mailbox capability that allows one-way and two-way exchange of messages as well as attached documents between the IRS, taxpayers and their representatives,” she said.
It’s important to the tax-exempt bond community, Ripperda said, “Because with trustee statements, business information returns, legal opinions, closing agreements and just a plethora of bond documents that are shared with the tax exempt bond program, those can all be shared electronically.”
Only 16 of the 300 taxpayers that have been invited to participate in the secure communication program have opted in so far.
Ripperda said the IRS is hoping to expand participation in the coming year.