WASHINGTON — The Internal Revenue Service has asked some issuers to pay back part of the federal subsidy payments for their direct-pay bonds because the wrong sequestration reduction rate was used to determine the payment amount, said Rebecca Harrigal, the director of the IRS' tax-exempt bond office.
Harrigal and other officials from the IRS and Treasury Department spoke Friday at the meeting of the tax-exempt financing committee of the American Bar Association's taxation section.
Under the American Recovery and Reinvestment Act, state and local governments could issue taxable, direct-pay bonds in 2009 and 2010 and receive subsidy payments from the Treasury equal to a portion of their interest costs. For example, issuers who sold Build America Bonds could receive subsidy payments from the Treasury equal to 35% of their interest costs.
However, the subsidy payments for direct-pay bonds have been reduced because of federal spending cuts known as sequestration. The reduction rate for part of fiscal year 2013 was 8.7%, and the reduction rate for fiscal 2014, which began Oct. 1, is 7.2%. Due to a processing glitch, some issuers that should have had their subsidy payments reduced by 8.7% instead had their payments reduced by only 7.2%, Harrigal said.
Harrigal said around a few hundred issuers were affected. The IRS recently sent letters to the affected issuers asking them to pay back the difference between what they were paid and what they should have been paid. Those with questions about the issue can call 877-301-5153, she said.
Sequestration kicks in on a date in between when the issuer files the refund claim and the date of the interest payment. The date when sequestration kicks in "is invisible to issuers," and the wrong date was used to calculate the refunds, Harrigal said.
The IRS is working to change the process for the fiscal year switch-over to ensure the problem with the switch-over from the FY-2013 to the FY-2014 reduction rates doesn't happen again, she said.
Harrigal also provided updates about TEB's work on streamlining settlements.
TEB is creating two key standard closing agreements: one to be used in connection with examinations and the other for the voluntary closing agreement program, she said.
"The whole idea here is to standardize, to simplify, and to ... target our limited resources where they're most needed," Harrigal said, adding that people who have had problems or concerns with closing agreements should let her know.
The office is also doing a "significant rewrite" on the Internal Revenue Manual for VCAP, she said. The current manual has subjective standards for the times to file documents, and Harrigal said she wants to make the standards objective.
A new team is charged with looking at the consistency and enforceability of non-standard settlements, Harrigal said.
One lawyer mentioned that there have been cases in VCAP that were all-but-finished but were being held up for months. Harrigal said she wants the closing agreements to move along.
Another topic Harrigal spoke about is TEB's outreach efforts. The office expects to have three upcoming phone forums. In the first one, to be held in June, Harrigal will talk about how TEB is set up and what it does. TEB will also release taxpayer publications in the near future on governmental bonds, 501(c)(3) bonds and other private-activity bonds that provide an overview of rules, Harrigal said.
Vicky Tsilas, Treasury associate tax legislative counsel, provided the bond lawyers with an update on bond-related developments in the White House, Treasury and Congress. She noted that there is interest in reviving the BAB program, or creating a similar program, among Obama administration officials and members of Congress.
In a hearing last week on the Highway Trust Fund, Senate Finance Committee Chairman Ron Wyden, D-Ore., touted BABs as a tool that was successful in getting private capital to invest in infrastructure. Rep. Richard Neal and Sen. Ed Markey, both Massachusetts Democrats, have each introduced legislation that would permanently revive the BAB program at lower subsidy rates and prevent issuers from being hurt by sequestration. In addition, President Obama's fiscal 2015 budget proposes America Fast Forward Bonds with a 28% subsidy rate and recommends barring the subsidy payments from being reduced under sequestration.
One meeting attendee said it appears that congressional Republicans have viewed direct-pay bonds as spending programs and asked Tsilas if the Republicans' resistance to this type of bonds appeared to be softening.
Tsilas said she's not sure, but that direct-pay bonds are part of the discussion on infrastructure financing.
"The nation has to come up with a solution to finance infrastructure," Tsilas said, and added that direct-pay bonds have been a good model. "I think people are stepping back and examining it further," she said.
