IRS expands audit of PREPA Build America Bonds
The Puerto Rico Electric Power Authority said the Internal Revenue Service has expanded an audit of the agency’s Build America Bonds that PREPA first reported in April.
The initial IRS audit involved $355.7 million of BABs the utility issued in 2010. The expanded audit involves additional payment dates for the same BABs, which are Power Revenue Bonds Series EEE and Series YY.
The tax issue that is at stake in the audits involves of federal payments for the direct-pay subsidy for these tax-advantaged bonds.
Notification of the expanded audit was received by PREPA in letters from the IRS dated July 12 that said the examinations will involve Forms 8038-CP related to the bonds, according to a public filing posted Tuesday on the EMMA database of the Municipal Securities Rulemaking Board.
This latest IRS action is part of a series of audits involving government agencies in the commonwealth of Puerto Rico in the midst of its historic debt restructuring.
The IRS also is auditing bonds issued by the Puerto Rico Sales Tax Financing Corp. known as COFINA, the Puerto Rico Public Buildings Authority and the Puerto Rico Municipal Finance Agency.
The PREPA, COFINA and Public Buildings Authority audits all involve Forms 8038-CP filed in connection with the issuance of BABs and Recovery Zone Economic Development Bonds.
The Municipal Finance Agency audit involves an arbitrage lawsuit.
Kristin Franceschi, a partner at the law firm of DLA Piper who is representing Puerto Rico in all four audits, said in an email Wednesday, “I cannot comment other than that it is not a surprise considering there was already one 8038-CP audit open on the same issues.”
The other audits in the apparent pattern of IRS activity include examinations of $59 million in 2005 Series B Refunding Bonds issued by the Puerto Rico Municipal Finance Agency, $320.2 million of Series YY Build America Bonds also issued by PREPA in 2010, and $877.9 million in school bonds the Puerto Rico Public Buildings Authority issued in 2011. That audit includes $121.5 million of Series 2011 T direct-pay qualified zone academy bonds and Series 2011 R taxable school construction bonds that totaled $756.4 million.
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%.
None of the three Puerto Rico audits involve the IRS audit priorities for the current 2019 fiscal year. The IRS has said its auditors plan to focus on excessive cost of issuance for private activity bonds, defeasance, and public safety or jail bonds.