CHICAGO - The Internal Revenue Service's tax-exempt bond branch has established a task force to identify and notify bondholders when the IRS has issued a proposed adverse determination letter warning that the bonds they hold may be taxable.
Robert Henn, senior manager of TEB field operations, told attorneys meeting here that the bondholder unit was established in June, in order to enable the IRS to more quickly find the bondholders if they have to tax their interest earnings because of tax law or regulatory violations. Henn was speaking on a tax enforcement panel at the National Association of Bond Lawyers' annual Bond Attorneys' Workshop here.
But Bradley S. Waterman, a Washington-based tax controversy attorney, expressed some concern about the impact bondholders could have on the appeals process.
"I acknowledge that the government has a legitimate concern here," he said. "But armed with the information, bondholders could become involved in the process, and their involvement could interfere with the exercise by the issuer of their statutorily-granted appellate rights."
Henn said the creation of the group does not change the IRS bond branch's policy of notifying bondholders in such situations, but rather merely creates a group of agents devoted to that purpose.
"This is nothing different than what we've always done, there's no change in procedure," he said. "We believe that by having one unit, we can be more effective in identifying bondholders and more efficient in that process."
Under the current process, if the IRS delivers a proposed adverse determination that a bond issue is taxable, the agencywill begin seeking out bondholders for notification.
Henn said yesterday that the IRS agents will contact bondholders they believe they have identified through the public record. After receiving confirmation that they indeed are the holders of the bonds for the period in question and for the proper amount, the IRS will send them a copy of the proposed adverse determination letter.
Once the case has been resolved in the IRS Office of Appeals, the agency will again notify the bondholders of their new tax liability, or the fact that the examination was closed with no change to the tax exempt status of the bonds. Henn emphasized that either way, the bondholders are notified, so that "the loop is closed, and we don't leave bondholders hanging out there."
The IRS has previously warned bondholders that their bonds may be taxable. Some market participants have complained that the IRS move is a ploy to pressure issuers into reaching settlements with the agency, but the IRS defended the action, saying that in some cases the statute of limitations has been expiring and the agency needs to be prepared to notify bondholders quickly.
When asked by a NABL member if the creation of a team will place additional pressure on issuers to settle with the IRS, rather than continue the examination through the Office of Appeals, Henn said: "Our obligation is to protect the government's interests, and we need to be prepared to do that."
W. Mark Scott, a partner at Vinson & Elkins LLP who headed up the IRS tax-exempt bond office when it began regularly notifying bondholders of adverse determinations, said the creation of the task force makes sense.
"I'm not surprised at all they're moving in this direction," he said. "And it is a really smart move on their part to put it in a separate group."
Henn was asked about the group after Clifford Gannett, director of the agency's tax-exempt bond office, said on the panel that his office has had to deal recently with some representatives of issuers "not acting in good faith" and unnecessarily prolonging audits. He said in these instances, when there are attempts to "run out the clock on taxpayer exposure," his office is prepared to act "very expeditiously" to avoid an expiration of the statute of limitations.
Meanwhile, on a separate panel on post-issuance compliance, Gannett announced that sometime next month, the IRS will likely roll out its streamlined voluntary closing agreement program, or SCAP. The program, under which issuers will be able to pay predetermined penalties for some common, relatively minor tax law and rule violations on a voluntary basis, was recommended in June by the Advisory Committee on Tax Exempt and Government Entities, which is made up of market participants in the tax-exempt area.
Also, in a speech late Wednesday, John J. Cross 3d, tax legislative counsel for the Treasury Department's office of tax policy, said his office welcomes comments regarding the effective date of the recently released proposed regulations on public approval requirements for the issuance of private activity bonds.
While most market participants praised the proposal, which modified, updated, and streamlined the 20-year old rules, many have noted that the current effective date, which does not occur until the rules are finalized, prevents anybody from taking advantage of them now. But Cross said he has already received comments on this issue and that, "It's unfortunate that that's not in" the [rules]. He said his office is "very seriously" considering allowing issuers to use the proposed rules before they are finalized.
