WASHINGTON — The Internal Revenue Service collected more than $45 million in payments from municipal bond issuers and other transaction participants in 2007 audit settlements and voluntary closing agreements, which market participants said is a record amount.
Tax-exempt bond office director Clifford Gannett revealed the figure yesterday at a briefing on TEB’s 2008 work plan. He also said that inquiries from other federal regulators have pushed him to dedicate his senior technical adviser to assisting in “external” muni-related investigations.
Michael Muratore, formerly an arbitrage and tax law specialist in the TEB office, has been placed in such a position since mid-October, Gannett said. He has joined the ranks of TEB field agents who are aiding other federal regulators such as the Justice Department and the Securities and Exchange Commission in investigations that involve the municipal bond market.
Just over a year ago, it was revealed that Justice’s antitrust division, the IRS criminal investigation division, and the Federal Bureau of Investigation are conducting a wide-ranging criminal probe of alleged anti-competitive behavior in the bidding for guaranteed investment contracts and other muni-related investments.
The SEC is conducting a parallel, civil investigation.
“A lot of securities lawyers involved in the investigations have been turning to tax folks, saying they need tax support,” said one attorney who did not wish to be identified. “On the government side, Mike’s an obvious choice.”
With Muratore’s reassignment and other staffing shortfalls, the tax-exempt bond office is looking to hire several more people this year, officials said yesterday.
“There is a recognition that we are running very light at the moment,” Gannett said. TEB has elevated Chris Wooden, another member of its arbitrage team, in Muratore’s place as a key provider of assistance to IRS field agents and group managers.
Steven Chamberlin, TEB’s head of compliance and program management, said he aims to hire at least four new people for his office in 2008.
IRS officials at yesterday’s briefing said that in fiscal year 2007, which ended Sept. 30, they collected about $40 million in closing agreement payments from transaction participants in 49 audit settlements, and $5.3 million from 23 voluntary closing agreement program, or VCAP, settlements.
The settlement amount is likely the most TEB has ever collected in a year, according to sources.
Gannett declined to provide specifics after the briefing yesterday, but said “the lion’s share” of the settlements addressed abusive situations.
A September 2006 report by the Treasury Inspector General for Tax Administration said that TEB collected $100 million in settlement payments between fiscal years 2002 and 2005. The office closed about 365 other cases in 2007, many of them claims for refunds of overpaid arbitrage rebate, and reduced its case cycle time from over 300 days to 177.
It also settled 66 cases under the voluntary closing agreement program, which issuers use to approach the IRS when they discover compliance problems with their bonds.
Going forward, officials confirmed that TEB is and will continue to use the forward float valuation methodology it developed for a targeted VCAP initiative “across the program,” in audits as well as VCAP cases involving float agreements.
“It’s a starting place,” Gannett said. “We’re receiving good input from [issuer] representatives. There’s a healthy discussion going on, and we’re definitely open to that. We’re listening to the community.”
The director added that TEB is “coming to resolutions. We are successfully settling cases on forward floats,” which are investment contracts used by issuers to cover cash flow gaps between the time Treasuries in their advance refunding escrows mature and the time debt service payments are due on the related bonds.
On the post-issuance compliance front, TEB has received all the responses it requested from hundreds of hospitals and other tax-exempt charitable organizations this year, in surveys that aim to gauge compliance in the sector. The IRS is analyzing the data and comments provided in those surveys and could follow up next year with educational initiatives, a targeted voluntary closing agreement program, or even a series of audits.
“The jury’s still out on that until we actually take a look at the information,” Gannett said. The office is also “pretty close” to finalizing changes to the Form 990, the annual information return filed by exempt organizations, he noted.
Changes proposed this year would require tax-exempt entities with more than $100,000 in outstanding bonds to submit the form and “Schedule K,” a supplement that asks for detailed information on private use of bond-financed facilities, fee arrangements with deal participants, and other aspects of 501(c)(3) bond transactions.
Chamberlin said the IRS is working to clarify the instructions for Schedule K, as well as some of its questions. He said it is “highly likely” that the IRS will provide some sort of transition relief for entities required to submit the schedule, which could mean a delayed effective date for all or part of the schedule.
Changes to VCAP procedures are also in the works, namely ones that will allow municipalities with outstanding tax-credit bonds access to the program, and an option to e-mail requests in to the IRS.
Robert Henn, field operations manager for the tax-exempt bond office, also noted that TEB still plans to delve into tax-exempt student loan bonds next year, opening a “relatively small number” of audits to learn more about the sector.
IRS officials at the briefing also said they will notify 395 clean renewable energy bond issuers later this month how much they can issue next year, and expressed hope that the agency would make “substantial progress” in releasing guidance in 2008 on record retention for muni issuers.
TEB aims to close 60 VCAP cases and 460 regular examinations in 2008, compared to the 2007 goals of 65 VCAPs and 490 audits. It hopes to maintain a “case timeliness” figure — the number of days it takes to process an exam — of 244, and to improve its “examination quality” benchmark to 90%, from 2007’s goal of 88%.
“It would appear that they are putting a lower emphasis on examinations,” a market source said yesterday. “They now also have to do 250 new CREBs compliance checks, but they’re saying the numbers are going to be lower.”