The Internal Revenue Service has asked about 200 private-activity bond issuers to provide information within three weeks about their compliance with arbitrage rebate computations and payments, prompting some bond lawyers to worry about the burdens that this will impose on the issuers.
The "Information Document Requests" have been sent to issuers in the last several weeks as part of the tax-exempt bond office's continuing initiative to examine compliance with arbitrage regulations, Clifford Gannett, director of the office said at the Council of Infrastructure Financing Authorities' 2008 Federal Policy Conference here. These "correspondence audits" stem in part from the office's previous look into arbitrage rebate compliance, which found that in nine out of 58 examinations issuers failed to rebate a total of about $4 million of arbitrage on time.
Arbitrage rebates were "an ongoing noncompliance area," Gannett said. "Sweeping that problem under the rug is risky and I would say unethical."
The recipients of the examination requests were not chosen because the IRS believed they had potential problems with their arbitrage rebate compliance, Gannett said. He emphasized that the questionnaire is meant to gather information about what issuers are doing to comply with arbitrage rules, and is not intended to be used as an enforcement tool.
But in a copy of a draft letter accompanying a four-page questionnaire that was obtained by The Bond Buyer, the IRS states: "At this time, we have no reason to believe that your debt issuance fails to comply with any of the applicable federal tax requirements. As always, we reserve the right to expand this examination to any aspect of your debt issuance."
The questionnaire asks issuers to provide, within three weeks, information including: a description of the bond-financed project and its status; the allocation of the proceeds; a list of expenditures financed by the proceeds, including the amounts and dates they were paid; and the dates of rebate computation and payment.
The form also asks for a number of copies of documents tied to arbitrage rebate, such as any rebate computations including bond yield computations, any yield restriction analysis, overpayment claims made to the IRS, and any forms filed with the IRS when submitting rebate payments or penalties in lieu of payments.
Linda Schakel, a partner with Ballard Spahr Andrews & Ingersoll LLP here, said the detailed request could present a challenge for issuers trying to answer in time.
"In addition to asking generally about rebate calculations and timely filing, it is essentially asking for the backup of expenditures," Schakel said. "If an issuer is exempt from rebate, it will still be required to provide all of the expenditure data, identify the specific project, and provide the final allocation of bond proceeds. I would expect that many issuers will need to consult counsel to prepare this, not just their rebate analyst. The short turnaround time, 21 days from when the letter is dated, not when it is mailed or received, will definitely place a large burden on the issuer receiving this out of the blue."
Bruce Serchuk, an attorney with Nixon Peabody LLP here, talked about the questionnaires during a CIFA session, calling them "very comprehensive" compliance checks.
"Based on the information document requests I have seen for an arbitrage rebate audit, it appears that the IRS will be doing a detailed and comprehensive review of whether a bond issue is in compliance with the arbitrage rebate requirements and the yield restrictions applicable to the issue," he said after the session.
Serchuk said he expects the IRS will eventually expand these examinations to include governmental issuers, similar in fashion to the agency's handling of its post-issuance compliance surveys, which first went to 501(c)(3) organizations but now to soon be sent to municipal issuers.
Gannett said that a subsequent round of examinations could be sent to governmental issuers, but that will depend on the results from the questionnaires sent to private activity bond issuers.
The agency appears to be examining bonds issued in 2002 or earlier, market sources said. That would mean that the issuers would have already rebated arbitrage to the IRS at least once, since arbitrage must be calculated and any necessary rebate paid five years after the issuance of the bonds.