IRS closes audit of Virginia jail bonds without penalty

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The Internal Revenue Service last month closed an audit of jail bonds issued by a regional authority in southwest Virginia without taking any action on their tax-exempt status.

The audit included a $24.6 million series of 2018 federally taxable refunding bonds issued by the Western Virginia Regional Jail Authority as well as series 2015 and 2016 refunding bonds.

“By letters dated December 23, 2019, the IRS informed the Authority it elected to close the audit examination for the Series 2015 Bonds and the Series 2016 Bonds with no change in the position that interest paid to the beneficial owners thereof is excludable from gross income,” the authority said in a public filing Tuesday on the EMMA database of the Municipal Securities Rulemaking Board.

The Western Virginia Regional Jail Authority said in its public filing that it was selected under the IRS’s “random audit program for jail facilities financed in whole or in part with the proceeds of tax-exempt bonds.”

The Western Virginia Regional Jail Authority serves the counties of Roanoke, Montgomery and Franklin as well as the cities of Roanoke and Salem.

The jail authority did not respond to a request for comment on the recent audit.

The 2016 Official Statement for the bond issuance said the money was being used to refund bonds issued in 2007.

The regional jail is a two-floor facility on about 43 acres in western Roanoke County that was opened in 2009 to relieve overcrowding in local jails with an initial capacity to house 605 inmates and later expanded to accommodate 983.

Jail bonds are being targeted by the IRS for audits this year with respect to whether federal government use of locally built facilities or management contracts with localities causes excessive private business use.

Jail bonds are one of the IRS’s three enforcement priorities for 2019-20. The other two are whether sinking fund over-funding causes the tax credit bonds to be arbitrage bonds and whether variable rate bonds comply with the rebate and yield restriction rules under Internal Revenue Code Section 148.

The IRS is expecting to close about 500 audits in its Tax Exempt Bonds office during the current 2020 fiscal year, which is about the same number as in fiscal 2019.

The Office Tax Exempt Bonds is headed by senior manager Allyson Belsome.

Belsome, who is based in the suburbs of Chicago, assumed the position in November after serving as senior manager of ITG/TEB Technical which generates computer-driven guidance for selecting priorities for field audits.

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Tax audits Tax-exempt bonds IRS Washington DC Virginia