WASHINGTON — The Internal Revenue Service Monday shed some light on its Build America Bond enforcement efforts, announcing what it hopes to achieve with its audits and how BABs will fit into its voluntary-closing agreement program so that issuers will not lose all their subsidy payments for minor inadvertent violations.
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The tax-exempt bond office “is aware that BABs and other direct-pay bonds present novel interpretative issues and factual scenarios for issuers,” the IRS said in the notice. “As such, compliance programs with respect to direct-pay bonds will reflect both TEB’s responsibility to promote compliance and its recognition of the importance of reasonable efforts to achieve compliance in light of such issues and scenarios.”
The IRS said it is working to update its Internal Revenue Manual’s VCAP section to address violations that are specific to BABs. The VCAP program allows issuers that identify minor violations with their bonds to approach the IRS to settle them, usually for smaller penalties than if the violations were found during an audit.
Specific issues under consideration for inclusion in the VCAP include violations on the tax law’s restrictions on premium, capital expenditure and issuance costs. Under the tax law, BABs cannot be sold with more than a deminimis amount of premium and 100% of available proceeds must go toward capital expenditures, issuance costs, and a reserve fund that meets the reasonable reserve requirements of an issuer. In addition, issuers must make an irrevocable election that the bonds are direct-pay BABs.
In the meantime, BAB issuers can turn to the tax-exempt bond version of VCAP to resolve any problems they find with their direct-pay bonds, the IRS said.
The agency also said it expects the number of audits of direct-pay bonds will be “roughly proportional” to the amount of audits it does on tax-exempt deals. However, IRS officials declined to provide specific numbers, saying that they simply want to highlight that taxable BABs will not be audited at a significantly higher rate rather than any sector of the tax-exempt bond market.
The IRS included in the notice a sample information document request form it is sending to issuers whose BABs are under audit, detailing the types of information and documents it is seeking. However, it noted that the actual form an issuer receives could differ from that sample.
The form asks issuers for information that relates to specific BAB requirements, including the limitation on premium and the capital expenditure requirement. It also asks for information to help determine if any BABs may be treated as “retired or extinguished” because of a “merger of interests.” An official explained that this means whether BABs are purchased by parties related to the issuer that would cause the bonds to be retired.
The IRS had asked audited BAB issuers for any information about investors that may be related to the issuer, including any pension plans that issuer employees may participate in.
However, the agency stated in the notice that questions asked in the forms “are not indicative of any legal position taken by the IRS with respect to the requirement for BABs.”
The announcement comes less than a week after two BAB issuers disclosed audits of their bonds. The city of San Antonio and the Metropolitan Water Reclamation District of Greater Chicago both disclosed last week that their BABs were being examined by the IRS.
