The Internal Revenue Service withheld $707,757, or 15%, of the District of Columbia’s Dec. 1 Build America Bond subsidy payment because of payroll taxes, making the city the latest issuer caught by surprise with an offset.
The city was notified by the IRS in November that the offset would be withheld from its scheduled $4.7 million subsidy payment. Officials said the subsidy payment was for its first BABs, which totaled $630.9 million and were sold in December 2009.
The offset “will not affect bondholders in any way” and it was not due to a late payment, said Treasurer Lasana Mack. He said the problem had to do with how the district’s payment of employment taxes was applied. It pays more than $30 million a month to the federal government in employment taxes.
“This is a relatively minor discrepancy that we intend to resolve,” Mack said. “It was really not something we could have foreseen.”
Concerns about the offset did not stop the district from issuing BABs a month later, just before the program expired on Dec. 31. The city sold $342.6 million of BABs last month as income tax-secured bonds and $181.3 million as general obligation bonds.
Standard & Poor’s first reported the offset in a Dec. 14 rating report. The offset “did not have an impact on the rating,” John Sugden-Castillo, Standard & Poor’s lead analyst on the district, said in an interview Monday. He noted the size of the offset “was not significant” and said the district pays debt service without assuming the BABs subsidy, “so it did not affect [the district’s] ability to pay debt service.”
Issuers have had lingering concerns about the potential for federal interference in the subsidy payments since the first part of the year when IRS officials said BAB subsidy payments technically are considered tax refunds and that the federal government may withhold from such payments, any amounts the issuer owes to the federal government, even if they are not bond-related. Austin, Maryland, and New York City had a portion of their subsidies withheld — each less than $1 million.
In most of the cases that have become public, the amounts the issuer owed had nothing to do with the BABs — leaving debt officials unaware of any threat to the subsidy payment until they received an IRS letter.
The Treasury Department’s Financial Management Service, which is charged with distributing payments for federal agencies, has an automated system that checks taxpayer records to see if any money is owed to the federal government before a BAB payment is made.
The Treasury inspector general for tax administration reported in July that less than 1% of BABs subsidy payments had been offset.
In August, Alan Krueger, who was then the Treasury’s assistant secretary for economic policy, said only $300,000 of the $626.45 million of BAB subsidy requests the IRS had received through Aug. 6 had been withheld. More than 99% of subsidies had been paid. Apart from the TIGTA spokesperson, Treasury and IRS officials would not return calls for comment Monday.
TIGTA has not continued to keep track of BAB offsets, but “might be looking at it again,” a spokesperson said Monday.
Still, the offset fear has led some issuers to forego BABs. Iowa and South Carolina did not issue BABs partly because of offset concerns.
Maryland last May had $6,869.54 withheld because of employment taxes. Now, to prevent further offsets, the office of debt management double-checks with the state’s central payroll to make sure there are no outstanding issues with the IRS.
The state also calls the IRS Treasury Offset Program Call Center, which is operated by the Financial Management Service, to make sure there are no pending offsets, said Patti Konrad, Maryland’s director of debt management.