WASHINGTON — The Internal Revenue Service will process Build America Bond and other direct-pay bond payments manually for a two to three weeks to factor in 8.7% sequestration cuts, but is working to ensure this does not delay the payment process.

"All of the returns that are now coming in, we think that because we have set up this manual system, for the most part we will stay on that time table," said Cliff Gannett, acting director of government entities at the IRS since April 2011. "Our hope and expectation is that it will not delay anything and we will get these payments out timely."

The IRS hopes to return to automated processing of the subsidy payments with the cuts in four to six weeks, Gannett said.

Gannett said there is always the potential for delays, but that the goal is not to have any.

A direct-pay bond issuer must submit a Form 8038-CP 45 days before its interest payment date to ensure the IRS can process and make the payment before that date. Generally, most of the 8038-CP requests for direct-pay subsidies that were filed with the IRS before March 1 were paid without cuts because sequestration was not in effect, Gannett said.

On Monday, TEB issued guidance outlining the payment procedures for direct-pay bond issuers.

Issuers must continue to submit Forms 8038-CP for the full amounts of their subsidy payments.

During the two-week period when cuts are being manually calculated for payments, issuers will receive a letter from the IRS acknowledging that their forms were received. The request for payments will then be processed and payments will be sent to the issuers accompanied by another letter that explains why the payments were reduced.

After the IRS begins automated processing of the forms in mid-April, the IRS will send an issuer only one letter acknowledging the receipt of the form and stating how much the payment will be reduced.

There are $3.351 billion worth of sequestrable BAB payments and $914 million of sequestrable payments for other direct-pay bonds, according to a recent Office of Management and Budget report.

The BAB program was created in 2009 as part of the American Recovery and Reinvestment Act and expired at the end of 2010. Issuers were given the option to issue BABs as tax-credit bonds, where investors receive tax credits, or direct-pay bonds, where issuers receive subsidy payments from the Treasury equal to 35% of their interest costs. But only about $181.96 billion direct-pay BABs were issued during that period.

The IRS views recovery zone economic development bonds, also created under the ARRA, as a subset of BABs, but the subsidy payments for RZEDBs equal 45% of interest costs. RZEDB proceeds must be used for promoting development or other economic activity in recovery zones. They can be used for capital expenditures, public infrastructure, and construction of public facilities, as well as job training and educational programs.

The Hiring Incentives to Restore Employment Act (HIRE), enacted in March 2010, gave issuers of qualified zone academy bonds, qualified school construction bonds, qualified energy conservation bonds, and clean renewable energy bonds the option of issuing these tax-credit bonds as direct-pay bonds.

For these direct-pay bonds, QSCBs were the most issued and will receive the biggest cut in subsidy payments under the sequester, according to the OMB. QSCBs, which can be issued by states and large, local educational agencies to finance school construction, have $820 million of sequestrable payments that will be cut $42 million, OMB said.

A total of about $38 million sequestrable payments for QZABs will be cut about $2 million, OMB said. QZABs can be issued by states and school districts to finance renovation or rehabilitation, as well as equipment purchases, for public schools within empowerment zones or enterprise communities.

Subsidy payments for QSCBs and QZABs equal the actual interest rate on the bonds or the tax credit rate.

QECBs have $32 million worth of sequestrable payments, which will be cut $2 million, according to the report. QECBs can be used by states, local governments and Indian tribal governments to finance energy efficiency and renewable energy projects within their jurisdictions.

CREBs have $24 million of sequestrable payments that will be cut by $1 million, OMB said. CREBs are used by state and local governments, as well as public power providers and electric cooperative companies to finance renewable energy projects. Both QECBs and CREBs subsidy payments are equal to 70% of interest costs.

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