IRS officials outline compliance strategy
Internal Revenue Service officials said Friday their current audit priorities for tax-exempt bonds include advanced refunding bonds with defeasance escrows that were funded with open market securities.
“These exams included determination of new restriction compliant fair market value requirements and identification of any slow growth failures,” Allyson Belsome, program manager of the IRS Office of Tax-Exempt Bonds told members of the National Association of Bond Lawyers.
Belsome was one of five IRS officials who spoke about compliance and enforcement during NABL’s annual workshop, which was held online this year for the first time.
The IRS publicly releases an annual list of audit priorities shortly after the Oct. 1 start of the fiscal year, but other priorities are added to that list during the course of the year.
The 2020 IRS compliance strategy announced a year ago focused on jail bonds with respect to whether federal government use and management contracts cause excessive private business use; whether sinking fund over-funding causes the tax credit bonds to be arbitrage bonds; and whether variable-rate bonds comply with the rebate and yield restriction rules under Internal Revenue Code Section 148.
The new list for fiscal 2021 is expected to be released in a week or two, according to Edward Killen, deputy commissioner of the Tax-Exempt and Government Entities Division. The new priority strategy will have more transparency and flexibility, he said.
Killen also said the IRS TE/GE Division published an accomplishments statement in March reviewing its work in fiscal 2019.
There have been additions made to the 2020 list over the course of this year, such as advanced refunding bonds with defeasance escrows, Belsome said.
In addition, she said the IRS “will soon initiate exams on private activity bonds issued to finance airports, which will include arbitrage compliance determinations, as well as whether the requirements under 142a requiring 95% of the net proceeds to be used for airport purposes were met.”
Another addition made earlier this year, according to Belsome, was comprehensive examinations of Section 144 small issue bonds.
“However, that work has been impacted by our current COVID operating environment,” she said. Normally an IRS agent will conduct a small issue bond exam during a site visit, but that sort of work has been suspended.
The IRS announced earlier this year the suspension of all new tax exams until July 15 and, although the service has once again begun starting exams, Belsome said the IRS is mindful that taxpayers are impacted by the pandemic.
“We work with those taxpayers in the exam context, as their unique circumstances might warrant,” she said.
IRS officials did not specify how many cases have been closed in the last couple of years under the Voluntary Closing Agreement Program.
Todd Mitchell, TEB technical manager, said COVID-19 has had a minimal impact on the number of VCAP cases and that there has been “a pretty stable stream of submissions” that remains less than the previous decade.
VCAP settlements have been on the decline, falling to 27 cases in fiscal 2018 from 44 in 2017, 67 in 2016, and 122 in 2015.
In 2019 the new minimums on settlements were raised to $5,000 for audits and $2,500 for a VCAP.