The Internal Revenue Service last week issued a notice and revenue procedure designed both to clean up regulations governing issuers who fail to rebate arbitrage on municipal bonds and to formally notify issuers that all rebates must be sent to the IRS office in Ogden, Utah.
In the revenue procedure, the agency described the procedures by which issuers of state or local bonds can correct failures to make timely payments of arbitrage that must be rebated to the government, and outlined the criteria used to determine whether an issuer has willfully neglected to rebate.
Clifford Gannett, manager of outreach, planning, and review in the IRS tax-exempt bond office, said the changes were part of what the agency hopes is an ongoing effort to update all of its revenue procedures.A lot of our processes have developed, and the rules have changed and improved since then, Gannett said. This is [an attempt to] get the whole system of processing working smoothly.
Gannett said the IRS knew many of its revenue procedures had been overwhelmed by regulatory and administrative developments, and that in some cases, issuers were working with later, conflicting versions of the regulations.
Theyve reorganized how it works, and I think it reads better, said Linda Schakel, tax partner at Ballard Spahr Andrews & Ingersoll LLP.
Under IRS regulations, issuers must rebate to the federal government arbitrage earned on municipal bonds. Issuers who fail to rebate arbitrage in a timely manner are required to explain their failure to rebate, but a loophole for rebate amounts of less than $50,000 existed under a subsequent revenue procedure.
The revenue procedure issued last week modifies the existing one, but does not replace it, leaving room for issuers to waive the explanation requirement if they have less than $50,000 to rebate on an older issue.
Lynn Kawecki, tax law specialist in the agencys tax-exempt bond office, said the IRS noticed that the bond community was trying to balance old and current regulations. You can see in a number of the filings that the issuer had read both and was trying to make its filing fit both requirements, he said.
We needed to have this revenue procedure reflect exactly where the rules are today, Gannett said. There was also a need for more clarification [on the] imposition of penalties and how you go about asking for an extension for timely paying a rebate.
The IRS also fleshed out what it considers willful neglect to rebate arbitrage in a timely manner by listing the eight factors used to evaluate cases.
The service will consider the amount of the unpaid rebate, the sophistication of the issuer, the length of the delay, the steps taken to comply, and the nature of the failure, according to the revenue procedure.
Other areas of concern are the history of timely or late payments by the issuer and the steps taken by the issuer to prevent the failure from recurring.
Prior regulations mentioned an innocent failure to rebate, but did not formally explain the criteria used by the IRS.
We dont want to appear as though we dont have clear standards that were applying that the bond community can rely on, Gannett said. This gives them a better handle on the instances where the automatic waiver potentially would not apply and a sense of how were coming up with our determinations.
Gannett said the IRS is spending quite a bit more time looking at returns as part of its efforts to identify abusive transactions. This revenue procedure has a bit more importance in the world today where there is oversight and processing going on, he said. These issues are at the forefront of what were doing.
The agency also announced that all rebate payments for bonds subject to certain older regulations are to be sent to its Ogden location. The processing responsibility shifted as part of a wider restructuring of where certain IRS work was being done, Gannett said.
The address change is new in the regulations, but not new in practice, as the Ogden location has been processing rebates for about six years, according to Michael Muratore, tax law specialist in the IRS tax-exempt bond office.
