WASHINGTON – The Internal Revenue Service is auditing $55 million of general obligation limited tax water reclamation bonds that were issued in 2007 by the Clark County, Nev. Water Reclamation District. The district disclosed that the IRS sent it a Nov. 22 letter informing it of the audit. The letter did not specify why the bonds were selected for audit.

"We routinely examine municipal debt issuances to determine compliance with federal tax requirements," wrote IRS agent Allen Tse. "There are several ways we select a municipal debt issuance for examination. We may select it as part of an initiative, project or referral, due to a questionable or unusual item on the return, or as a random selection."

"We use a centralized case selection and review process to enhance consistency of enforcement activities, and to focus resources on areas having the most positive impact on municipal debt issuances. Our tasks include identifying areas of noncompliance, developing corrective strategies, and assisting with those strategies," Tse added.

The issuer received a four-page "Information Document Request" seeking, among other things, a complete copy of the bond transcript, any rebate or yield restriction reports or analyses, as well as explanations of accounting methods for gross proceeds, investments and expenditures.

The district said it intends to cooperate with the IRS for the audit.

It also said a portion of the 2007 bonds were refunded with some of the proceeds of a $269.47 million GO limited tax water reclamation refunding bonds sold earlier this year. The district noted that the tax-exempt status of the interest on the refunding bonds is in part dependent on the tax-exempt status of the interest of the refunded bonds and disclosed the CUSIPs of the refunding bonds.

In his letter, Tse wrote, "After completing my review, I'll discuss my findings with you and explain if the tax-advantaged status of your bonds is affected. Many cases involve no proposed changes to the bonds' status. If I find potential problems with the bonds' qualification, I'll explain your options to resolve the problems without affecting the holders of the bonds."

The 2007 bonds were to be used to construct, reconstruct, improve and extend the district's sanitary sewer system as part of a five-year capital improvement program.

The underwriter for the 2007 bonds was Merrill Lynch & Co. The bond counsel was Swendseid & Stern, a member of Sherman & Howard in Las Vegas and Reno, Nev. The law firm also served as special counsel to the district in connection with the official statements.

Hobbs, Ong & Associates, Inc. in Las Vegas and Public Financial Management, Inc. in Seattle were financial advisors on the transaction.

The bonds were rated AA+ by Standard & Poor's and Aa2 by Moody's Investors Service. Some maturities were insured by MBIA.

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