WASHINGTON — The Internal Revenue Service said Wednesday that only about 20% of governmental issuers that responded to a survey showed they have written procedures or some system to make sure they comply with tax laws and rules after their bonds are issued.
By comparison, almost half of the nonprofit organizations that responded to the survey had written procedures or ad hoc systems for post-issuance compliance, according to the IRS.
The IRS’ tax-exempt bond office sent out the post-compliance questionnaires and obtained responses from 192 nonprofit organizations in 2007 and 172 governmental issuers in 2009. The final report on the responses said there is a difference between what the issuer and borrower communities view as proper post-issuance compliance and what the IRS deems acceptable.
The report found almost all nonprofit issuers had some standards for post-issuance compliance and most had an employee in charge of monitoring post-issuance compliance.
Roughly 60% of governmental issuers and 95% of nonprofit organizations indicated they had written procedures for tax law compliance. But the IRS said a closer analysis of their responses to the survey showed much lower percentages of implementation of post-issuance compliance procedures.
These gaps are “consistent with our past examination experience of bond issues,” the IRS said in the report.
Written procedures for record keeping are key to preserving the tax-exempt status of municipal bonds. A failure to fulfill record-keeping obligations may result in the bonds losing their tax-exempt status, according to the IRS.
“Overall, our analysis indicated a high level of awareness of compliance requirements” among issuers, the IRS said in the report. “However, there still appear to be significant misconceptions and inadequacies concerning the responsibilities of governmental issuers and conduit borrowers in post-issuance compliance.”
With written procedures, the TEB office said that its “ultimate goal is to promote post-issuance compliance while continuing to work with the industry to reduce the taxpayer burden relative to record retention” and other requirements. The office said it will continue its outreach in this area and will work with the Treasury Department on record-retention guidance.
The TEB office said that of those responding to the survey, three governmental issuers and 11 nonprofits said they do not have bonds outstanding. Twenty-five of the governmental bond issuers and four nonprofit groups did not respond to survey and the TEB office said they “have been referred for a follow-up.”
The survey results are a good attempt at “putting the carrot out there and encouraging people” to comply with retention rules, said W. Mark Scott, a tax lawyer and the former head of the IRS’ tax-exempt bond office.
But the final report doesn’t address situations where past records related to outstanding bonds are no longer available, he said, adding, this will continue to be an issue in some bond audits.
In May, the IRS sent out a questionnaire to about 300 issuers regarding advance refundings and record retention. Some of the questions in the May questionnaire were the same as the ones in this final report.
Responses from that questionnaire are due to be submitted to the IRS by July 15, according to Bob Griffo, a specialist in the TEB office.
“In the future, we’ll be able to issue reports more quickly,” he said.