WASHINGTON – The Treasury Inspector General for Tax Administration is preparing to examine the efficiency of an IRS effort to embrace the "Six Sigma" movement by using advanced technology for forms used to claim refunds for direct-pay bonds.

Six Sigma is a set of techniques and tools developed by an engineer at Motorola years ago to improve the quality of output of a process. It helps reduce errors in manufacturing and other workplace processes to as close to zero as possible.

Build America Bonds and other direct-pay bonds are taxable but are still tax-advantaged bonds because state and local issuers get federal subsidy payments equal to a certain percentage of their their interest costs minus any sequestration cuts.

In the current 2018 fiscal year, which ends on Sept. 30, the federal subsidy of 35% of interest costs for BABs is subject to a sequestration cut of 6.6%.

The outside of the Internal Revenue Service headquarters building in Washington.
The outside of the Internal Revenue Service headquarters building in Washington. Bloomberg News

The subsidy payment is claimed using IRS Form 8038-CP, according to Rebecca Harrigal, a shareholder at Greenberg Traurig in Philadelphia. Harrigal formerly served as director of the Internal Revenue Service's Tax-Exempt Bond office.

“It’s actually a very cool form because if you try to enter something in a field that’s wrong, it will say this is an inappropriate entry for this field,” Harrigal said. “That was the first smart form that came out and it was part of the lean Six Sigma process.”

A TIGTA spokeswoman said Thursday that the audit hasn't yet begun.

TIGTA lists 146 program audits for fiscal 2018 that are “concentrated on high-risk areas and the IRS’ progress in achieving its strategic goals.”

BABs were issued in 2009 and 2010 under the America Recovery and Reinvestment Act, allowing state and local governments that issued them to receive subsidy payments throughout the life of the bonds.

Some BAB issuers have either redeemed, or announced they can redeem, their bonds because sequestration triggered extraordinary redemption provisions in their bond documents.

Sequestration of mandatory spending was initially supposed to last through fiscal 2021, but was extended through fiscal 2023 under a 2013 budget agreement. It was then extended through 2024 in February 2014 in a bill that repealed reductions in cost of living increases for younger military retirees.

A budget deal in October 2015 extended sequestration to fiscal 2025 and the recently announced two-year budget deal extends it through 2027.

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