Treasury Probes IRS on PAB Volume Caps

WASHINGTON — The Treasury Department’s Inspector general for tax administration has found the Internal Revenue Service’s tax-exempt bond office cannot determine if states are complying with volume cap limits for private-activity bonds.

In a 19-page report, the IG said that, because the TEB office’s compliance work focuses mainly on ensuring individual bond issues are compliant with tax laws and rules, it lacks a broader perspective and is not monitoring whether states are exceeding their volume cap.

The issue is especially important since the American Recovery and Reinvestment Act contains volume-cap and carry-forward requirements for qualified school construction, recovery zone, and other bonds, according to the report, which was dated Sept. 14 but not publicly released until Friday.

State volume caps for PABs are based on population. For 2009, states can issue the greater of either $90 per capita or $273.270 million of the bonds. 

The inspector general’s investigation found that from a sample of 391 Form 8038’s 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 that the state actually carried forward that capacity.

To complicate matters, the tax administration IG found the bond forms contained a total of more than $11 billion of transcription errors between amounts submitted on bond and carryforward forms and amounts entered into IRS computer systems. More than $6 billion of errors were found on 14 of 391 bond forms, including mistakes involving volume cap allocations, amounts of bonds issued, and even the zip codes where bonds were issued.

Another $9.4 billion of errors were found relating to carryforwards, making it much more difficult for the TEB office to accurately survey the private-activity bond landscape and initiate useful audits.

“Without complete and accurate data, any processes the TEB office develops may not result in the accurate identification of bonds that are over the volume cap and therefore should be taxable,” the IG report said.

The inspector general found the 50 states and the District of Columbia did not issue PABs in excess of their respective cap limits in 2006 and 2007, and that no revenues were lost as a result. But if issuance rises in the future and begins to bump up against the cap, future tax revenues could be in jeopardy, the IG warned.

“Due to the challenging economic times the country is facing today, it is even more important that the IRS ensure that volume-cap limitations are not exceeded as the federal government works to stimulate the economy,” the report said. “While none of the states exceeded their respective annual dollar limitations in the years we reviewed, the TEB office would not have known if they had.”

The IG report said its review coincided with TEB’s implementation of  new processes to accommodate ARRA programs and that its findings do not necessarily reflect the current status of the office’s work.

The report recommended that TEB develop and implement processes that identify PABs that exceed the volume cap. Furthermore, the office should ensure that it receives state certifications of volume-cap allotment or carryforward documentations for reserved cap, as well as put in place a system that catches transcription errors.

TEB officials agreed with the suggestions and said they are putting programs in place that will take effect in 2010 and 2011. They said they plan to conduct a compliance research project in fiscal 2010 to gather information about how states allocate volume cap and identify potential compliance and educational programs they could adopt to ensure greater compliance to cap restrictions.

An IRS spokesman said TEB officials would not comment beyond their official response to the report, which was dated Aug. 14.

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