The Internal Revenue Service is auditing $28.6 million in 2012 general obligation refunding bonds issued by the city of Winchester, Virginia.
The public notice filed Friday by the city on the EMMA database of the Municipal Securities Rulemaking Board is the first report by any issuer in 2021 of any type of IRS audit communication.
“The city has no reason to believe that the IRS review will result in any adverse finding with respect to the tax-exempt status of the 2012 bonds,” the city said in its filing.
Winchester said it is in the process of supplying the IRS with the requested information. The
Although many IRS audits of tax-exempt bonds are not reported on the MSRB database, the fact that Winchester’s filing is the first one this calendar year highlights the recent drop in enforcement actions.
Last month the IRS Tax-Exempt Bonds unit reported that its closed around 200 fewer examinations in fiscal 2020 than had been expected because of the interruption caused by the pandemic.
New examinations were suspended between March and July of last year because of COVID-19.
As a result, the TEB unit closed nearly 300 cases instead of attaining its earlier goal of around 500 cases.
The earlier goal had been cited in a presentation to the National Association of Bond Lawyers more than a year ago but was not mentioned when the IRS announced its 2020 achievements in February.
The Winchester audit involves a history-rich city of under 30,000.
Located at the northern tip of Virginia near the West Virginia border, Winchester was founded in 1744 and granted a state charter as a city in 1752. It served as George Washington’s frontier headquarters during the French and Indian War.
The 2021 federal fiscal year began on Oct. 1, 2020.
The IRS said that its initial 2021 focus on tax compliance and enforcement involves potential arbitrage violations of Internal Revenue Code Section 148 by the investment of bond proceeds in higher-yielding investments beyond the allowable temporary period under Treasury Regulation (Treas. Reg.)1.148-2(e).
In fiscal 2020, the top IRS enforcement and compliance priorities were public safety and jail bonds, sinking fund overfunding, and variable rate bonds.
The exams that TEB did close in fiscal 2020 involved a combination of “compliance strategies and referrals, claims and other casework,” the IRS said in a summary published by Edward Killen, the acting commissioner for Tax Exempt & Government Entities group.
The majority of those cases -- 170 -- involved compliance strategies that “resulted in a written advisory to the bond issuer, including issues such as private business use and issuance costs,” the IRS said.
In addition to those 170 cases, the TEB unit closed over 100 examinations that were largely referrals and a project examining private activity bonds issued by 501(c)(3) organizations. “The most prominent issues found in the cases examined were arbitrage – claims for refund, rebates and yield restriction – and private benefit,” the IRS said.
The final portion of cases involved fraud-related casework, including cases referred for criminal investigation.
