The Internal Revenue Service’s tax-exempt bond branch will have to remain watchful that bond programs authorized by the American Recovery and Reinvestment Act are not used beyond their legal limits, according to a report released yesterday by the Treasury Department’s Inspector General for Tax Administration.

ARRA authorized state, local, and tribal governments to issue more than $45 billion of new bonds so it is vital that the bond branch ensures issuance does not exceed legally mandated program caps, TIGTA said in the report.

“If annual limits are exceeded, the federal government risks losing future tax revenue because excess recovery act bonds may not be eligible for tax credits or may be taxable” the 15-page report stated. “Due to the challenging economic times the country is facing, it is even more important that the [IRS] remain vigilant in ensuring that dollar limitations for bonds are not exceeded as the federal government works to stimulate the economy.”

The report, dated Jan. 8 but not publicly released until yesterday, is a follow-up to another TIGTA study issued in October that found the IRS tax-exempt bond office could not determine if states were exceeding their volume cap limits for private-activity bonds.

However, for the report on the ARRA bond programs, the inspector general did not actually audit IRS processes to determine if there were any troublesome areas, nor did it offer any specific recommendations for how the TEB office should monitor these programs going forward. Instead, the report just highlights concerns about over-issuance.

Though the TIGTA found deficiencies in the IRS’s ability to track private-activity bond volume caps in the earlier report, IRS officials told the inspector general that they are better situated to track ARRA program limits.

For example, some ARRA programs, such as the tribal economic development bond program, require issuers to request bond allocations directly from the IRS. In contrast, issuers receive allocations from individual states for PABs, with no IRS involvement.

The bond office also is monitoring the amount of ARRA bonds that have been issued based on information returns filed with the service — another control that is not in place for PABs.

The private-activity bond probe, detailed in a 19-page report, found that from a sample of 391 forms filed with the IRS after 2005, 18% did not include a mandatory state certification showing the PABs issued had been allocated a portion of the state’s volume cap. From 36 forms filed after 2003 that claimed to be using capacity that was carried forward, 28% did not provide evidence indicating the state actually carried forward the capacity.

The report also found that the TEB office focused on ensuring compliance for individual PAB issues instead of determining if aggregate bond issues exceed volume-cap limits and did not regularly receive all the information needed to track PAB volume caps. In addition, transcription errors led to a more than $11 billion discrepancy between what was reported by issuers and what was entered into IRS computer systems, according to TIGTA. In response, IRS officials said they would identify ways to improve PAB volume cap compliance by 2011.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.