IRS to Survey Governmental Tax-Exempt Bond Issuers on their Post-Issuance Compliance Practices

January 9, 2009

By the end of the month the Internal Revenue Service plans to send out about 300 surveys to governmental issuers of tax-exempt bonds on their post-issuance compliance practices. The purpose of the survey is to allow the Service to determine the extent to which issuers are complying with the federal tax laws and rules pertaining to their outstanding tax-exempt bonds. The specific questions asked are likely to be similar to the questions asked in a 2007 survey sent to non-profit organizations who were borrowers of tax-exempt bond proceeds. In that survey the Service asked questions on the following topics: (1) written compliance procedures and guidelines, (2) general recordkeeping and retention policies, (3) arbitrage yield restriction and rebate requirements, (4) expenditure and allocation of bond proceeds, and (5) private business use monitoring procedures.

Unlike the earlier survey, however, the Service has indicated that it plans to audit governmental issuers who provide unsatisfactory responses to this survey. For all governmental issuers, even those who don’t receive this survey, the establishment of effective post-issuance compliance procedures is critical—this survey is just one example of the increased emphasis the Service is placing on post-issuance compliance. This means not just keeping copies of documents, but implementing a proactive mechanism for complying with tax laws and monitoring tax issues before they become a problem. For example, issuers must monitor the use of bond financed property to ensure that the private business use rules are not violated. Additionally, issuers must ensure that bond proceeds have been properly allocated to qualifying projects and that they have been allocated in a timely manner. For those who do receive the survey, a prompt and accurate response is very important. The Service will use the survey as an opportunity to further scrutinize bond transactions.

According to the Service, although 95% of the non-profit organizations that responded to the previous survey stated that they had established procedures to ensure proper post-issuance tax compliance, less than half had actually written specific procedures or implemented an unwritten process to ensure monitoring and compliance. The Service indicated that the survey found that there are “significant pockets of industry inattention to post-issuance compliance, particularly with respect to maintenance of records throughout the life of the bonds” among charitable organizations. Additionally, the Service stated that inconsistencies in some of the data collected “warrant additional follow-up, including conducting additional field compliance checks to assess the veracity of data reported” in the survey. Certainly, the Service will be examining the results of the governmental issuer survey with an equally critical eye.

Due to the amount of information requested in the survey, most governmental issuers are recommended to seek assistance from a tax specialist if they receive a survey from the IRS. Attorneys at McGuireWoods have assisted several non-profit organizations with their responses to the 2007 survey and are fully prepared to assist governmental issuers in their response to this survey. Please contact us if you have any questions.