WASHINGTON — Rebecca Harrigal, the new director of the Internal Revenue Service's tax-exempt bond office, said one of her goals is to streamline and improve the closing agreement or settlement process.
Harrigal became the TEB director in October. "Since then I've been doing a lot of groundwork, learning about TEB operations, why and how certain processes were created, and what the initial thoughts were for this year's goals," she said in written responses to The Bond Buyer's questions about the outlook for 2014.
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The closing agreement program is a focus for Harrigal "because of the key role it plays in our operations," she said. Harrigal is reviewing how settlements are executed and whether there are new areas where there could be standardized closing agreements.
Harrigal said TEB has been asked to consider creating a special voluntary closing agreement program for when organizations temporarily lose their 501(c)(3) status because of noncompliance with requirements for charitable hospitals under section 501(r) of the Internal Revenue Code, created under the Affordable Care Act. This section, for example, requires hospital organizations to establish written financial assistance and emergency medical care policies and to limit amounts charged for emergency or other medically necessary care to certain individuals.
Additionally, TEB officials want market participants to suggest other possible areas that warrant special VCAPs.
Harrigal also said that she's "making sure we have sufficient procedures in place to ensure consistency and enforceability of our agreements." And she's "taken a hard look at our rewrite of the Voluntary Closing Agreement Internal Revenue Manual to make sure the provisions are clear and as transparent as we can be and to see which changes we've solidified enough to incorporate into that manual."
Changes under consideration would streamline the approval and execution process for closing agreements, but would not significantly alter how the agreements are negotiated, Harrigal said.
In fiscal year 2013, TEB worked on just over 100 VCAP submissions for roughly 350 bond issues. About 55 of the submissions relating to about 255 bond issues were closed as of Sept. 30, the last day of the fiscal year.
TEB collected almost $67 million in VCAP settlements, with the vast majority of that amount coming from cases under a special VCAP for student-loan bonds. TEB also often sees VCAP submissions associated with the sale or lease of bond-financed property when the issuer failed to take remedial action in a timely manner, Harrigal said.
In addition to improving VCAP, Harrigal said she is continuing a project to issue guidance regarding new applications for the remaining New Clean Renewable Energy Bond volume cap.
"One of my personal goals for TEB is making sure our documents are clearly written and as transparent of our processes as we can be," she said. "The CREB guidance will be one of the first public documents to be released reflecting this priority."
Harrigal is also in the midst of a review of the compliance questionnaire.
The questionnaires were a tool that TEB used to encourage "issuers to engage in post-issuance monitoring of their bonds and use of bond proceeds to ensure that the issue meets the requirements of the code throughout the life of the issue," Harrigal said. However, the questionnaire program was halted last year so that TEB could determine whether it should be modified to reflect best practices.
While the questionnaire program is on hold, TEB is continuing other post-compliance efforts.
Additionally, Harrigal wants to find ways to measure how satisfied issuers are with the IRS, which has sent issuer officials questions about this issue.
Harrigal has been involved with tax-exempt bonds for about 20 years. Notably, she served as chief of the TEB branch in the counsel's office from 1997 to 2008.
"She has a deep history with tax-exempt bonds," said Mike Bailey, who worked with Harrigal in the office of the chief counsel and now is a partner at Foley & Lardner LLP in Chicago. Bailey thinks that TEB will have a more prominent role overseeing munis in the IRS with Harrigal as its director.
National Association of Bond Laywers President Allen Robertson described Harrigal as someone who will be able to digest technical issues.
"We have someone who is a lawyer and is very experienced and very knowledgeable in the area," he said.
Audits
In fiscal 2013, TEB began taking a market segment approach to audits, in which the IRS chose types of bonds to target and then selected bond issues within those segments to examine.
In 2014, this program is being continued and TEB will be testing it to see if it needs any improvement, Harrigal said.
Allyson Belsome, the IRS' manager of tax-exempt bond field operations, told bond lawyers in September that areas of the market would be examined every year, including advance refunding bonds, bonds for which 8038-T forms are filed, tax and revenue anticipation notes, 501(c)(3) bonds and solid waste bonds. Other segments are being examined once every three years. IRS officials are still deciding what will be included in this category for fiscal 2014.
Harrigal said that some market segment audits were finished in fiscal 2013, while some are ongoing, and more examinations may be conducted in some segments in 2014. TEB also expects to start audits in new market segments, and the list of segments to be reviewed in 2014 will be complete when TEB finishes compiling its goals for the year.
Chas Cardall, a partner at Orrick, Harrington & Sutcliffe LLP in San Francisco, said that with the market segment approach, "the agents are more focused on the things they think really matter," and are on less of a fishing expedition.
Cardall expects to see "a lot more active and more focused auditing" because of the new approach. While the method will allow the IRS to be more efficient, clients of bond lawyers may not like that TEB may conduct more audits as a result of the increased efficiency, he said.
Tax-controversy lawyer Brad Waterman said the market segment approach "has worked well for the large business and international division since it was adopted in the early 1990s" and added, "I believe it will work well for TEB."
TEB completed slightly more than 1,000 examinations in fiscal 2013 and found actual or potential noncompliance in about 47% of those, according to Harrigal. Excluding VCAP settlements, the office received more than $43 million in settlement amounts in addition to required bond redemptions, she said.
Settlement agreements generally occurred because of a variety of violations. Other than nine student loan bond cases, they were not concentrated in any market segment, Harrigal said.
In fiscal 2013, TEB began about 60 audits of Build America Bond issues, and more than half of these exams have been completed. The IRS found violations is several of the audits, which were resolved with closing agreements or advisories, Harrigal said. An advisory is when the issuer receives a letter that an examination has been closed with no change to subsidy payments or tax status, but the issuer is advised of matters relating to tax compliance.
Additionally, TEB closed about 11 direct-pay bond exams, most with advisories. About 25 more of these cases are in process, and TEB has found violations in some of them. Violations include bonds being issued with more than a de minimis amount of premium and bond proceeds not being used for allowable purposes, Harrigal said.
Regulations and Guidance
The IRS priority guidance plan includes providing guidance on the definition of a political subdivision for purposes of tax-exempt and tax-advantanged bonds. Market participants are hopeful that the IRS will release some type of guidance on this topic during the coming year.
The issue over what constitutes a political subdivision has become a particular concern since the IRS issued a technical advice memorandum in May arguing that the Village Center Community Development District in Florida is not a political subdivision that can issue tax-exempt bonds because its board does not, and will not, include elected officials.
Frank Shafroth, director of the Center for State and Local Government Leadership at George Mason University, said special districts are the fastest growing type of government.
With the Village Center ruling, the IRS will see "they've opened up an absolute hornet's nest," he said.
Cardall said many lawyers don't know how the TAM will affect their deals.
"I don't think [the issue of the definition of a political subdivision can go] with no resolution for that long," he said.
Robertson noted that "Congress is interested in that topic." The issue is of particular interest for congressional members from Florida, where the Village Center CDD is located and where this type of financing is common. It also is expected to affect transactions in other states like Colorado and California.
Another item on the priority guidance plan is final regulations on public approval requirements for private-activity bonds. The proposed regulations simplify the existing rules, were published in 2008 and were positively received by market participants.
"Those regulations really ought to get finalized," Cardall said.
The IRS and the Treasury Department published proposed issue price rules in September that have been widely viewed as unworkable by municipal market participants. Groups criticized the proposed rules in comments they sent the IRS in December, and a public hearing on the proposals is scheduled for Feb. 5.
Market participants said they do not expect the proposed issue price regulations to be completed in 2014 and hope for more dialogue between market groups and the government officials following the hearing.
In addition to the issue price rules, there were other arbitrage regulations proposed in September that got a generally favorable reception from market participants. Cardall and Robertson said that they hope these proposed rules move forward.
Market groups are also interested in the IRS providing guidance on whether the accountable care organizations created under the ACA constitute private use and would thereby create private-activity bond problems for hospitals.
In September, an advisory committee to the IRS suggested a project to provide guidance on the arbitrage requirements for small governmental bond issuers and conduit borrowers of small 501(c)(3) issues.
"TEB believes this is an important project and, while TEB's goals are not yet finalized, I anticipate that this project will be among those goals although I suspect that it will likely take longer than this fiscal year to complete," Harrigal said.
