IRS audits of Puerto Rico agencies now total 8

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The Internal Revenue Service has expanded its audits of public agencies in Puerto Rico to a total of eight since earlier this year, with the two latest public disclosure notices filed Monday.

The Puerto Rico Buildings Authority and Puerto Rico Electric Power Authority reported the audits in postings on the EMMA website of the Municipal Securities Rulemaking Board.

The Buildings Authority audit is a more in depth review of a prior deal already under audit while the PREPA audit covers Series EEE Build America Bonds, according to Kristin Franceschi, a partner at the law firm of DLA Piper who is representing the Puerto Rico agencies in all of the audits.

The federal tax issue that is at stake in the BABs audits involves the federal payments for a direct-pay subsidy.

BABs receive a 35% federal subsidy on their interest payments, although that subsidy is subject to a federal budget sequestration reduction which varies each year. In the current 2019 federal fiscal year the cut is 6.2% of the 35% subsidy. That shaves 2.17 percentage points off the subsidy, reducing it to 32.83%.

Franceschi declined to comment on the new audits or to provide a progress report on the earlier announced audits.

Six of the eight audits — including the Building Authority audit disclosed Monday — involve IRS Form 8038-CP.

The other two audits involve Series 2005 B bonds issued by the Puerto Rico Municipal Finance Agency and the Series EEE Build America Bonds issued by PREPA.

The new PREPA audit is the third for that agency announced by the IRS his year. The other two were announced in July and April and also involve BABs.

The initial IRS audit involved $355.7 million of BABs the utility issued in 2010.

The July IRS notice involved additional payment dates for same BABs that are Power Revenue Bonds Series EEE and Series YY.

The third IRS audit of PREPA also involves $355.7 million in Series EEE BABs.

PREPA said the Sept. 6 IRS letter it received stated the following: “We routinely examine municipal debt issuances to determine compliance with federal tax requirements."

“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.”

PREPA said it “intends to respond to all correspondence from the IRS and intends to cooperate fully with the IRS in connection with the examination.”

The IRS did not include Puerto Rico in its 2019 enforcement plan, but a new one for 2020 is expected to be published soon.

IRS enforcement officials who attended a National Association of Bond Lawyers workshop in Chicago last week were not publicly asked during either of two panel discussions they participated in, whether there is a new enforcement initiative involving Puerto Rico.

Instead, both of those discussions focused on IRS staffing levels, internal reorganization of the service and revisions to IRS tax forms.

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Tax audits Direct-pay bonds Government bonds Build America Bonds IRS Puerto Rico Electric Power Authority Puerto Rico Public Buildings Authority Commonwealth of Puerto Rico Washington DC