Why IRS should change VCAP, remedial compliance programs

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WASHINGTON — The Internal Revenue Service is supporting recommendations for eliminating the adversarial elements in its voluntary closing agreement program for tax-exempt and other tax advantaged bonds, the chairman of the tax-exempt bond advisory panel said Monday.

“The IRS is very supportive of this,” said Bill Johnson, leader of the tax-exempt bond subgroup of the IRS Advisory Committee on Tax Exempt and Government Entities.

Johnson’s group released a report on June 7 suggesting new policies to encourage more issuers to self-correct and self-report tax law violations at a time when the IRS workforce is shrinking.

“As a result of Indian Tribal Governments and Tax-Exempt Bonds shrinking workforce and increasing workload, the volume of small and infrequent Issuers, and a decline in the individual and corporate tax rates, the fear of an examination of a particular issue (and the resulting potential liability and penalties) may not be enough to ensure Issuer post issuance compliance,” the report said.

As an illustration of the decreasing workforce, the report said IRS agents doing TEG audits is expected to drop to around 19 this month because of retirements, down from 23 in October 2017.

”The correction options must be simple, cost-effective and encourage self-compliance by providing an economic incentive for issuers to actively monitor and correct violations,” the report also said.

“If you self-correct, you would pay a minor fee,” said Johnson, a managing director of Hilltop Securities/FirstSouthwest Asset Management in Dallas.

His group suggested three levels of fees: a low cost one for remedial actions; a mid-range one for a VCAP agreement; and one that equals 100% of the compliance cost from an adverse audit finding.

The VCAP also should have fees that are not subject to negotiation in most cases, the committee recommended.

The current VCAP program for tax-exempt, tax credit, and direct-pay bonds “contain factors that discourage voluntary issuer compliance,” the report said.

VCAP settlements have been on the decline, falling to 44 in the 2017 fiscal year that ended Sept. 30 from 67 in 2016 and 122 in 2015.

Johnson described the process as “adversarial.” Participating in VCAP requires an issuer to hire an attorney and provide documentation in support of the VCAP application.

The VCAP dates back to May 1997. The IRS has made several changes to the program over the 21-year history of the program, including adding tax credit and direct-pay bonds.

The Advisory Committee on Tax Exempt and Government Entities recommended several reforms in 2010 to make the program more flexible and less costly to administer, including the addition of a streamlined VCAP (SVCAP).

Johnson said the report is his panel’s latest suggestions for saving time and resources.

“You have the issuer trying to do the right thing,” he said. “You’ve got the IRS with a certain set of guidelines. And I think the IRS’ current guidelines are not as issuer friendly as they could be. And if the object is to encourage self-compliance by issuers, we suggest the process be relooked at and [made] more issuer friendly.”

Christie J. Jacobs, director of the IRS Indian Tribal Governments/Tax Exempt Bonds section, told The Bond Buyer in a December interview that changes in the VCAP program were under consideration.

“We now have a VCAP program which can become very detailed … and [in] many instances expensive,” Jacobs said in December. “We are working with the TEG advisory committee of outside practitioners looking at a possible self-correction and reporting process similar to the way pension plans have self-correction tools that allow them to identify the problem and report it to the IRS without having the agency evaluate it.”

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