The Internal Revenue Service has issued procedures for its agents on how to apply the voluntary closing agreement program to Build America Bonds and other direct-pay bonds, such as resource recovery zone economic development bonds.
The new procedures, which were published late Thursday, appear in revisions to the IRS’ Internal Revenue Manual for the tax-exempt bond office’s agents in the field and in the office’s compliance program management section. They stem from recommendations that an advisory committee made to the IRS in a June 9, 2010, report.
The procedures are designed to encourage issuers to come forward as soon as possible when they discover their bonds have violated tax laws or rules. The VCAP permits issuers to voluntarily resolve bond-related violations of tax laws and rules.
The IRS detailed four types of tax violations that could occur with direct-pay bonds such as BABs.
A violation would occur if BABs become private-activity bonds. BABs must be governmental bonds, under the American Recovery and Reinvestment Act that created them in February 2009. A violation also would occur if BABs are issued for an impermissible purpose. Under the ARRA, BABs can only be used to finance capital expenditures RZDEBs can only be used to finance projects in areas suffering from economic distress.
Another violation would be triggered if BABs were issued with a more than de minimis amount of premium, which is defined by the ARRA as one-fourth of 1% of the stated redemption price at maturity for the bond, multiplied by whichever comes first: the number of complete years to the maturity date or the first optional redemption date. BABs also would violate the tax laws if the issuer acquires them and they are considered extinguished so that they no longer exist under the tax law.
For all of these violations, an issuer would pay the lowest settlement amount if it either has written post-compliance procedures in place or adopts such procedures immediately after discovering the violation and reports the violation to the IRS within 90 days.
In such cases, the issuer would be allowed to calculate the dollar amount owed for the violation from the date the violation was discovered, rather than the date the violation started occurring. As a result, the overall time frame during which the violation occurred would be reduced and the payment would be lower.
An issuer would pay a higher settlement amount if it came to the IRS with a request to enter the VCAP program within the first six months after a violation occurred. If the issuer did not approach the IRS until six months to a year after discovering the violation, it would have to pay an additional 10% in terms of the settlement amount.
The revised procedures give issuers flexibility in allowing them to request modified settlement procedures based on certain facts and circumstances relating to the violation. Other revisions to the manual specify how settlement amounts should be calculated when issuers enter into closing agreements with the IRS to settle tax violations for tax-credit bonds or direct-pay bonds like BABs.
For tax-credit bonds, the settlement amount is the present value of credit amounts that would have been allowed or allowable on each credit allowance date during the credit adjustment period of the bonds if the violation had not occurred, the IRS said. For direct-pay bonds, the settlement amount is the present value of the refundable credits that would have been allowed or are allowable during the credit adjustment period of the bonds, based on the interest rate or rates of the bonds issued if the violation had not occurred. The procedures permit issuers to modify their debt service schedules and pay closing agreement settlement amounts over time rather than up front.