WASHINGTON — The Internal Revenue Service made about $2.9 billion of subsidy payments to issuers of Build America Bonds and other direct-pay bonds through February, Cliff Gannett, director of the IRS’ tax-exempt bond office, said Monday.

Gannett talked about BABs and other issues in an interview after returning from Austin, where he spoke at the National Association of Bond Lawyers Tax and Securities Law Institute meeting on Thursday.

The IRS has had a total of roughly 5,000 requests for payments from direct-pay bond issuers since the program was created in early 2009, he said in an interview.

The tax-exempt bond office reviewed about 2,275 of those before payments were sent in fiscal 2010, which ended Sept. 30. TEB has reviewed another 1,800 since October, when fiscal year 2011 began, Gannett said.

The tax-exempt bond office reviews every “Return for Credit Payments to Issuers of Qualified Bonds” — requests for subsidy payments from issuers of direct-pay bonds before the payments are sent out, he said.

The IRS is conducting audits of 23 direct-pay bond issues, according to Gannett. He declined to elaborate.

Gannett described four teams the TEB office has established to do work in specific areas. The office currently is staffed with almost 100 individuals, he said.

The office has set up an eight-member direct-pay bond compliance team, led by Todd Mitchell, Gannett said. 

The team is currently working with counsel to develop guidance that will establish the procedures for audits of BABs and other direct-pay bonds, including how the IRS will inform issuers that the bonds may have violated tax laws and what rights the issuers will have to challenge the agency’s findings.

Gannett said he expects that guidance to be released, in the form of a revenue procedure, within the next few months.

The TEB office also has set up a seven-member team, led by Bob Griffo, to explore the tax-compliance issues that could arise from bonds issued by state and local governments in fiscal distress.

Gannett said issues that could arise might include: the impact of bankruptcy filings on bonds; whether changes to the terms of bond issues make the bonds reissued and subject to the most recent tax restrictions; what happens to bonds when they are used to finance working capital; and what is the impact on bonds when there is a distressed sale of bond-financed property.

The team is expected to explore whether tax-law violations that surface for such issuers and borrowers can be resolved under the voluntary closing agreement program, Gannett said.

An eight-member team led by Allyson Dodd is developing a questionnaire and audit initiatives in the arbitrage area, he said.

That team is currently starting about 100 audits focused on issuers who should have rebated arbitrage earnings but did not do so. It plans to begin 25 more audits in the fall on pooled bond issues and whether they complied with arbitrage restrictions, either rebate or yield-restriction requirements.

During the next few months, the team will send out compliance-check questionnaires to 300 to 400 issuers that have done advance refundings, asking about their procedures and practices for complying with yield-restriction and record-retention requirements.

Then in November or December, the team will begin 75 to 100 audits on advance refundings and whether they have complied with yield-restriction requirements, he said.

A fourth TEB team has been put together under Darrell Smelcer and is in charge of developing relationships with state officials who are involved in the muni finance area, Gannett said. That team has three people coordinating meetings between state officials and IRS agents, but covers all of the field offices, he said.

So far IRS officials have met with officials in 10 states and hope to hold ­teleconference calls with every state in the nation during next couple of months.

The goal of this program is for IRS officials to introduce themselves to state officials — typically finance officers, but often treasurers and others — and provide them with an overview of what the tax-exempt bond office does as well as listen to their concerns, according to Gannett.

He said the current budget restrictions have not affected the tax-exempt bond office’s operations for the most part.

“We’ve had to be a little bit more selective on outreach efforts that require travel,” Gannett said. “But we’re maintaining training.”

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