The Internal Revenue Service plans to send out post-issuance compliance surveys to governmental issuers and charitable organizations later this year in an effort to encourage compliance with the tax laws and rules, especially those pertaining to document and record retention.

The IRS already sent a post-compliance survey to more than 200 charitable organizations last year. This second one would be sent to a group of different nonprofits.

Cliff Gannett, the IRS tax-exempt bond office director, and Steven Chamberlin, senior manager of compliance and program management at the TEB office, discussed the surveys during a teleconference held yesterday by the National Association of Bond Lawyers.

The surveys are part of the IRS' ongoing efforts to make sure issuers continue to comply with tax requirements after they issue their bonds, said Gannett.

They are mainly intended to serve as an educational tool, both to notify the issuer of areas in which they should be compliant, as well as to indicate to the IRS where there are gaps in the knowledge of issuers and borrowers about post-issuance compliance.

While the surveys are not intended to be enforcement tools, Gannett told the bond lawyers, they carry a provision that says that if the IRS does not receive a response to the survey, they reserve the right to begin an investigation of the issuer or borrower.

But Chamberlin said the IRS has been "very pleased with the response rate." Out of 207 surveys issued to charitable organizations, they received 203 responses, he said. Chamberlin said he also has been encouraged by the depth of some of the responses.

"They took the questionnaire seriously, and that's an indication to me that they take their post-issuance compliance seriously as well," he said. "Many respondents voluntarily attached supplementary materials and comments."

Over 90% of respondents told the IRS they had written procedures and guidelines in place to address post-issuance compliance. But closer examination revealed areas of concern, Chamberlin said.

Only 15% of respondents were able to "verify conclusively" that they had implemented their procedures, either with a detailed explanation or copy of them. About 33% of the respondents said they had procedures but were unclear about the implementation, 28% said they relied just on the requirements found in a tax certificate or bond documents, and 18% did not provide any explanation of their procedures at all, he said.

Also, Chamberlin said the survey results indicate that a "significant" number of respondents either established or modified their post-issuance procedures recently, perhaps even in response to the survey.

"We have reason to think that the questionnaire not only provided us with information, but also had a direct positive influence on compliance," he said.

Gannett emphasized the point by noting that the surveys show issuers and borrowers that the IRS has a growing interest in post-issuance compliance.

"The practice of issuing these compliance checks is now known to the bond community," he said. "It should suggest to issuers that it's time to get serious."

The IRS TEB office will likely look favorably on issuers who develop post-issuance compliance procedures early, rather than in response to IRS inquiry, Gannett said.

"If these kinds of procedures are being put into place now, as opposed to some time in the future when the agent comes up and knocks on the door, I think that is going to be taken into account by my office," he said. "At some point, obviously, we're going to expect issuers that are involved in this market are doing these kinds of procedures or processes without having to be prompted."

The IRS expects to release an interim report of the findings of the first survey later this year.

The teleconference panel also addressed the recently released draft instructions for Form 990 and Schedule K, which requires nonprofit organizations to provide information about their bonds that are outstanding.

Mike Solet, a partner at Mintz Levin Cohn Ferris Glovsky and Popeo PC in Boston and moderator of the panel, asked Chamberlin about the fact that borrowers and issuers could face perjury charges if they fail to fill out the forms accurately.

While the IRS has said detailed questions on the form will only pertain to bonds issued after 2002, the inclusion of refundings would extend to underlying bonds issued several years ago, when records may not have been kept.

"When an official of an organization is faced with Schedule K and he's asked for hard information and that hard information doesn't exist, what should that official do?" Solet asked. He wondered if the IRS should add a "best ability" provision to the instructions to protect issuers in these situations.

Chamberlin said the issue presents "several interesting options," and invited the public to offer comments and suggestions on the instructions. The IRS has set a June 1 deadline on receiving public comments on the instructions.

Solet and the IRS officials were joined on the panel by Ed Oswald, a partner at Orrick, Herrington & Sutcliffe LLP, and Frederic L. Ballard, Jr., a partner at Ballard Spahr Andrews and Ingersoll LLP.


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