New IRS Scrutiny on Post-Issuance Compliance Procedures for Tax-Exempt Bonds – October 2011

Oct 25, 2011

October 25, 2011
Denise Ganz, Esq.

Three 2011 Internal Revenue Service (“IRS”) releases, described below, highlight the importance to the IRS that issuers and conduit borrowers engaged in tax exempt or tax credit financings implement formal post-issuance compliance plans.
As a result, issuers of governmental bonds may need to formalize policies and procedures relating to post-issuance compliance. Although 501(c)(3) borrowers have already been addressing post-issuance compliance issues when completing Form 990, Schedule K in connection with their tax-exempt bonds, the recent IRS releases indicate that greater focus on post-issuance compliance systems is warranted.

• In April 2011, the IRS released a new Form 8038 for private activity bonds that contains two new “check the box” line items. The first asks the issuer to check a box indicating if it has established written procedures to take remedial action to address private business use problems. The second requires the issuer to check a box indicating if it has written procedures to monitor arbitrage requirements. In October, 2011, the IRS released a new Form 8038-G, which includes the same line items for governmental bonds.
• In July 2011, the IRS released its “Final Report on Governmental and Charitable Financings,” detailing the results of two compliance questionnaire projects it conducted in 2007. The first targeted charitable organizations that were beneficiaries of tax-exempt financing and the second targeted issuers of governmental bonds. The report concluded that although a majority of respondents were aware of post-issuance compliance rules and had procedures in place to address the same, fewer than half of the charitable organizations and only about 20 percent of the governmental issuers were able to produce evidence of either specific procedures or an ad-hoc process to assure compliance. The IRS reported that it will continue to stress the need for procedures through similar questionnaire checks.
• On September 8, 2011, the IRS released updated procedures for its Voluntary Compliance Agreement Program (“VCAP”) through additions to the Internal Revenue Manual. Under VCAP, an issuer (or a conduit borrower in cooperation with an issuer) can request relief from a violation of a tax requirement pertaining to tax-exempt bonds, tax credit bonds or direct-pay bonds. Such request must include an affirmative or negative statement as to whether the issuer has adopted comprehensive written procedures intended to promote post-issuance compliance. The issuer must also include a detailed description of the portion of such procedures that relate to the VCAP request, including the authorized person(s) who adopted the procedures, the officer(s) responsible for monitoring compliance, the frequency of compliance check activities, the nature of the compliance check activities undertaken, and the date such procedures were originally adopted and subsequently updated. The IRS will consider the extent to which an issuer has appropriate written compliance procedures as an equitable factor in determining appropriate resolution of VCAP requests.

In view of these recent developments, issuers and 501(c)(3) borrowers should consider whether they have the necessary policies and procedures in place to allow them to “check the box” in the new line items in the applicable Form 8038 and demonstrate post-issuance compliance to the IRS when questioned or otherwise required to do so. Issuers should also take appropriate steps to determine that conduit borrowers have the appropriate policies and procedures in place in this regard. The attorneys of Greenspoon Marder’s Public Finance Department are available to assist in all aspects of the foregoing, including the development of written guidelines and internal information-gathering systems related to post-issuance compliance issues.

If you have questions regarding this topic contact Denise Ganz, Esq, 954-491-1120 or [email protected].

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New IRS Scrutiny on Post-Issuance Compliance Procedures for Tax-Exempt Bonds – October 2011

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