SEATTLE - Processing applications and distributing payments to issuers that have sold Build America Bonds present a "significant challenge" for the Internal Revenue Service tax-exempt bond office, an official said here Sunday.

Clifford Gannett, director of the IRS' bond office, spoke on a panel at the Government Finance Officers Association's annual meeting. He said his office's responsibility for handling BAB payments marks a significant departure from its previous workload on distributing payments, which consisted of just "a handful" of rebate refunds. Direct-pay BABs are taxable debt municipal issuers can sell and opt to receive a federal subsidy equal to 35% of their interest costs.

Gannett's office must process applications for direct-pay BABs, determine if the application is valid and the bonds qualify for the program, and then ensure that the payments are received by issuers on the date they pay interest - everything put together amounts to a "very interesting compliance challenge for my staff," he said.

But help is on the way for Gannett's bond branch. He said Sunday that his office has significantly expanded due to increased funds from the American Recovery and Reinvestment Act. The number of field agents has doubled with 30 new hires, and he also brought in 11 new tax-law specialists, bringing that total to 16. Gannett's office now has 102 employees.

He noted that with the new hires, the TEB office is no longer the smallest national office at the IRS. He further noted that calling it the "tax-exempt bond office" may be becoming a misnomer, as his team is now overseeing taxable BABs, as well as billions of dollars of taxable tax-credit bonds.

Not only is the office getting larger, but the new hires are boosting the talent level of his team as well, he said. Many of the hires are former bond lawyers and municipal finance professionals who bring with them advanced levels of experience and expertise, according to Gannett.

"The numbers don't tell the whole story," he said. "We really have improved the quality of our work force."

Not only will the increased hires help with TEB's increasing workload, but Gannett said he hopes his team will have a larger presence within the muni community.

Turning to compliance issues, Gannett urged the issuers to keep a close eye on their bonds and to come to the IRS voluntarily if they find noncompliance.

"It is extremely important ... that you find whatever problems there are first and surface them," he said. If issuers come forward voluntarily, he promised "a reasonable and responsive audience from my staff."

Gannett's team also may turn their attention in the future to sending out more questionnaires to governmental bond issuers. The IRS sent out 200 questionnaires to governmental issuers in January asking for detailed information about their compliance and record-retention procedures and practices.

It was not clear whether Gannett intended to continue probing post-issuance compliance practices, or if the new questionnaires might check on other compliance issues.

The January surveys were due back to the service on April 26, but the agency was willing to grant extensions if an issuer asked in most cases. Gannett said Sunday that his office has received roughly two-thirds of the surveys back. Even taking into account extensions, he said, "We do believe there are several that just didn't respond." He noted that roughly 98% of nonprofits responded to a similar survey last year.

The IRS will likely examine issuers that did not return the surveys and did not receive extensions, and may follow up on certain specific issues with issuers that did respond. Unlike the 200 similar surveys the IRS sent out to nonprofit issuers last year, the agency reserved the right to follow up their governmental survey findings with audits if deemed necessary.

Gannett said his team hopes to get out a final report on their findings from this set of surveys sometime this fall.

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