WASHINGTON - The Internal Revenue Service has launched a "Fast Track Settlement" program that would allow tax-exempt bond issuers and nonprofit organizations that are under audit by the IRS and meet certain conditions to obtain settlements within 60 days.
The IRS on Monday announced the creation of the FTS program, which is effective immediately, and said its tax exempt and governmental entities division and Office of Appeals would be jointly overseeing a two-year pilot of the program. After that period, the program will be re-evaluated, adjusted if needed, and made permanent if successful, the agency said.
While bond attorneys were still digesting the details of the new program, some said it could be helpful in situations where prompt resolutions to audits are needed.
"I can believe that it could have useful applications for tax-exempt bonds ... Fast track will give the IRS another tool to use for certain transactions where there is a need to get a quick resolution," said David Caprera, a partner at Kutak Rock LLP in Denver. He provided an example of a situation where one of his clients could have benefited from such a program.
"We were involved with an audit where the bonds were floating-rate bonds and the issuer published disclosure regarding the progress of the audit. The market reacted adversely and the bonds started trading at close to taxable rates," he said. "Ultimately, the issue was settled with the IRS, but the amount the issuer ended up paying was a small fraction of the amount of additional interest it paid to the bondholders during the period the audit was ongoing. A faster resolution would have saved the issuer a significant sum."
Under the program, which mirrors similar ones in other IRS divisions, an issuer or organization under audit by the IRS can approach the manager in charge of the examination and request a fast track settlement. The taxpayer can only opt for the program before the IRS has reached a proposed adverse determination that the interest earnings from the bonds are not tax-exempt.
If the manager accepts the application, the two go to the appeals office and begin settlement negotiations with the goal of reaching an agreement within 60 days.
During negotiations, an appeals official specializing in the FTS program will serve as a neutral party focused on reaching a prompt settlement between the taxpayer and the IRS, or their representatives. Both parties retain the right to withdraw from the process, and if an agreement cannot be reached, the taxpayer has the option of continuing the issue through the traditional appeals process.
According to the announcement, FTS is available to any examinations involving: income tax, exclusion of income from interest paid on municipal obligations, issues over exemption, foundation or qualification, income tax, employment tax, estate and gift tax, and excise tax.
However, the program is only available to issuers or organizations when the disputes meet certain criteria. The issues at stake must be fully developed, the issuer or organization must have stated its position in writing, and there must be a limited number of disputed issues with the IRS.
There also are a number of situations where the program would not be available under any circumstances, including rebate claims or cases in which the appeals office lacks jurisdiction such as the determination of penalties against individuals or firms that promote abuses in bond deals or tax shelters under Section 6700.
Also off-limits to the program: correspondence examination cases; cases in which the taxpayer failed to respond to IRS communications and no documentation has previously been submitted for consideration by tax exempt/governmental entities; cases involving potential civil or criminal fraud; selected initiatives determined annually by TE/GE; issues designated for litigation or under consideration for litigation; and frivolous issues.
Furthermore, the IRS notice states that the appeals office FTS program manager will first determine whether appeals has the available staff resources before accepting a case into the program.
FTS should not be confused with the Streamlined Closing Agreement Program, which was recommended to the IRS in June by the advisory committee on tax-exempt and government entities, several lawyers said.
Under the SCAP program, the IRS would establish a predetermined list of commonplace minor violations and assign predetermined penalties for them. Issuers could then tell the IRS when they have committed these violations and settle with the agency for the predetermined penalties.
IRS officials responded positively to the recommendation, but the program has not yet been established.
While both the FTS and the SCAP programs would focus on reaching prompt agreements with issuers or organizations in violation of the tax code, FTS is only for those already undergoing an audit with the IRS. SCAP is for those who discover a minor violation and voluntarily approach the IRS regarding a closing agreement before any audit is initiated.