CHICAGO — The Internal Revenue Service will begin sending a second round of questionnaires, this time online, to issuers of 501(c)(3) bonds and governmental bonds next year requesting information about their post-issuance compliance practices, an agency official told bond lawyers meeting here.
The IRS’ tax-exempt bond office compliance program initially kicked off their questionnaire project in 2008, mailing out a first round to the issuers that also asked about post-issuance compliance practices.
“A lot has happened since then, from ourselves and in terms of the work we’ve done promoting post-issuance compliance,” Steve Chamberlin, manager of compliance and program management for the IRS’ tax-exempt bond office, or TEB, said on an enforcement panel at the National Association of Bond Lawyers’ 37th annual Bond Attorney’s Workshop.
The other panelists were Jeremy Spector, a partner at Mintz Levin Cohn Ferris Glovsky and Popeo PC in New York who was moderator; Michael Bailey, a partner at Foley & Lardner LLP in Chicago; Brad Waterman, a tax controversy lawyer, and Milton Wakschlag, a partner at Katten Muchin Rosenman LLP in Chicago.
“A lot has been done from associations such as NABL in promoting post-issuance compliance,” Chamberlin told conference attendees. “We want to test whether or not there has been any movement in terms of what is actually going on out there.”
Post-issuance compliance is one area that has driven IRS enforcement in the past few years.
“We have found from our experience that many times when a deal closes everything is fine, but it is what happens upon implementation,” Chamberlin said. “How are the proceeds actually spent or allocated? What type of contracts are amended later that can create private-business use or qualified use?”
The IRS is looking at bond financings that are more likely to have post-issuance events and are more likely to potentially have a problem that might go unidentified and uncorrected.
Since 2008, the IRS has sent out other questionnaires on direct-pay bonds that were focused on Build America Bonds, advanced refunding bonds and most recently qualified school construction bonds.
The IRS sent 111 questionnaires to issuers of QSCBs in April. It was the first time the IRS mandated that the questionnaires be completed online and the first time they developed questionnaires for QSCBs.
The online QSCB questionnaires were “incredibly efficient” and it is a platform that the IRS will move towards on an ongoing basis, according to Chamberlin.
QSCBs, which are taxable, can be issued as either tax-credit or direct-pay bonds similar to Build America Bonds. The IRS has been concerned about the pricing of direct-pay bonds because it has a bearing on whether the federal government is paying an appropriate subsidy to the issuers of these bonds.
The TEB office is still working on analyzing and reporting their findings from the previous questionnaires, Chamberlin said. In the meantime, they will begin work on the online questionnaire for 501(c)(3) issuers and governmental issuers.
Separately, the TEB office rolled out a new internal bond-related referral initiative with the exempt organizations department this summer.
The exempt organizations department and TEB developed a check sheet that has been distributed to every revenue agent in the EO examination division. The TEB office also conducted a training session this summer with all of the EO agents that explained the new check sheet.
EO conducts audits on whether or not an entity is an exempt organization, but now they are also looking at whether there is unrelated use of bond-financed property by the exempt organization.
“If they have bond property, [the agents] will fill out the check sheet and it will guide them to whether or not it is a referable issue or not,” Chamberlin said. “It’s really new but there is a possibility that we could be getting a lot of referrals. We don’t know yet.”
The focus on bond-financed property stems from provisions in the tax law that state 501(c)(3) bonds could be taxable if more than 5% of the bonds are not being used for an exempt purpose.
Meanwhile, the IRS will embark on a multi-year comprehensive review to update all of the TEB returns. The plan will be outlined in the TEB’s 2013 work plan, which is scheduled for release at the end of this year.
The review process will be based in part on the recommendations the TEB office received from the IRS’ Advisory Committee on Tax-Exempt and Government Entities known as ACT. In June, that group reported that some of the agency’s bond-related forms are overly burdensome and recommended eliminating some questions.
The across-the-board form review will include, among others: the 8038 series of forms for information about various kinds of tax-exempt bonds; Schedule K on 990 forms, which requests information on bonds issued by nonprofit organizations; the 8703, which is the annual certification for a residential rental project, and the 8328 form, which is filled out by issuers who carry forward unused private-activity bond volume cap.
“These forms have developed over time,” Chamberlin said. “As new legislation comes in, things become disjointed.”
The TEB office recently organized a group of IRS agents that began brainstorming on a proposed review process. Chamberlin said he is hopeful that the project can be completed in less than three years.
Finally, the TEB office will continue work on a comprehensive update of their Internal Revenue Manual guidelines. IRMs are intended to be published annually, but a new one hasn’t been published in several years.
The IRM update process began last year and is expected to be completed by the end of 2013.