Tax-Exempt Bond Compliance Reporting Given a Mixed Grade by IRS

July 18, 2011

The IRS Tax Exempt Government Entities Division has published a final report on its Tax-Exempt Charitable Financings Compliance Check Questionnaire and Governmental Bond Financings Compliance Check Questionnaire projects. The projects principally evaluated whether IRC section 501(c)(3) organizations and governmental bond issuers generally have a sufficient level of knowledge of the post-issuance tax compliance requirements applicable to their tax-exempt obligations. In addition, the questionnaires asked governmental issuers and 501(c)(3) organizations about their compliance training programs for individuals responsible for monitoring post-issuance compliance of tax-exempt bond financings. See

Focus of the Report

The initiative focused on measuring several aspects of post-issuance compliance practices of 501(c)(3) colleges, universities, hospitals and senior housing projects regarding:

  • Written procedures or guidelines,
  • Recordkeeping and retention policies,
  • Arbitrage yield restriction and rebate requirements,
  • Bond expenditures and asset management procedures; and
  • Private business use monitoring procedures.


Monitoring compliance with the rules for tax-exempt bonds after the bonds have been issued is a shared responsibility between a governmental issuer and the entity borrowing the bond proceeds. State and local governments issue the bonds on behalf of section 501(c)(3) organizations, which in turn use the proceeds to facilitate their large capital project needs. If records are missing or incomplete, the IRS will attempt to promote post-issuance compliance. However missing or incomplete records, could lead the IRS to conduct an examination and find that the bonds may be in substantial noncompliance. In that case the IRS has several options from issuing a warning to a proposed revocation of the tax-exempt status of the bonds, enter into a settlement agreement with parties or apply section 150(b)(3) to hold any portion of a facility financed from the proceeds of any private activity bond subject to unrelated trade or business as defined under section 513.


While 95% of the 501(c)(3) organizations responding to the questionnaire indicated that they had implemented procedures to ensure effective monitoring of post-issuance compliance, 16% of 49% had implemented written specific procedures and 33% did so on an ad hoc basis. Moreover, while 97% of the respondents said that they had maintained necessary books and records to substantiate compliance, a number of the respondents indicated that they had not necessarily retained certain types of records on a consistent basis including their Form 1023 application for tax-exemption. Failure to maintain this record could result in noncompliance of their 501(c)(3) status and the requirements of section 145.


The report found that the responses to the questionnaire indicted a high recognition of the importance of post-issuance compliance and recordkeeping but that “the overall effectiveness of such program was questionable.” The report suggested the following actions:

  1. That 501(c)(3) and governmental organizations have clearly defined procedures to implement post-issuance compliance to insure that person responsible for post-issuance compliance fulfills their duties.
  2. Retention of sufficient records to allow responsible officials to successfully perform compliance monitoring.
  3. Monitoring of post-issuance compliance and recordkeeping should be integrated with existing accounting procedures.

Future IRS Actions

The report indicted that the Tax Exempt Bond Unit of the IRS may issue further questionnaires targeting post-issuance compliance and record retention practices of issuers of other types of bonds.

Section 501(c)(3) organizations that file a schedule K, Supplemental Information on Tax-Exempt Bonds, to their Form 990 should consider undertaking a compliance review of their regularly and records retention practices to make sure that they are meeting all the IRS tax-exempt bond requirements.

McGuireWoods LLP Nonprofit & Tax-Exempt Organizations Group

Our nonprofit and tax-exempt organizations lawyers provide advice and guidance that enable charities and other nonprofits to operate more efficiently and effectively in today’s increasingly complicated, regulated and competitive environment.

McGuireWoods LLP Higher Education Practice

Our higher education attorneys represent public and private colleges and universities. This representation includes statutory and regulatory compliance and investigation work relating to the Higher Education Act of 1965 and federal student aid programs. It also includes issues relating to NCAA investigations, faculty tenure, financing expansion, low income housing, 501(c)(3) and other tax issues, student lending compliance and investigations, intellectual property, students and academics, housing, governance, endowment management, and construction.

McGuireWoods LLP Healthcare Group

McGuireWoods offers an experienced team of more than 50 lawyers well-versed in serving the needs of the healthcare, pharmaceutical, life sciences and medical device sectors. We understand the daunting array of legal and business issues our clients face, and we work tirelessly to find effective solutions to their daily challenges.