IRS Extends Carrot to Issuers of Tax-Advantaged Bonds to Encourage Adoption of Post-Issuance Compliance Procedures
IRS Indicates That Issuers Adopting Written Procedures for Post-Issuance Compliance May Receive More Favorable VCAP Settlements
On August 5, 2011, the IRS released new internal guidance for specialists working in its voluntary closing agreement program (VCAP). This guidance includes elements designed to promote IRS-wide efforts to encourage issuers to develop and adopt post-issuance compliance procedures as an, essentially, “best practices” standard. VCAP is the existing program pursuant to which issuers may report that they have violated a federal tax rule applicable to their bonds and seek relief to assure that their bonds remain tax-advantaged. The IRS indicates that issuers who discover a violation of the tax rules in accordance with the implementation of its post-issuance compliance procedures can expect to receive more favorable treatment in resolving a tax violation than if the issuer has not implemented such procedures. The IRS also indicates that the implementation of appropriate written tax compliance procedures is a positive factor that may be considered in resolving cases under audit.
IRS Now Routinely Inquires Whether Issuers Have Procedures in Place
Over the past two to three years, the IRS has added to its bond-related information returns, 990 Schedule K for charitable entities, 8038B, 8038TC, 8038, and, most recently, 8038G, questions concerning the existence of post-issuance compliance procedures. More detailed questions concerning adoption of post-issuance compliance procedures are now routinely included in compliance check questionnaires and audit letters as well.
What the IRS Expects
Specifically, the IRS is looking for issuers to develop, adopt and implement comprehensive procedures that are separate from their bond documents and integrated into their compliance systems. The procedures should contain certain key characteristics, including making provision for:
- Due diligence review at regular intervals;
- Identifying the official or employee responsible for review;
- Training of the responsible official/employee;
- Retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds and use of bond-financed facilities);
- Procedures reasonably expected to timely identify noncompliance; and
- Procedures ensuring that the issuer will take steps to timely correct noncompliance.
The goal of establishing and following written procedures is to identify and resolve noncompliance, on a timely basis, to preserve the preferential status of tax-advantaged bonds. The IRS believes that an issuer that has established and followed comprehensive written procedures to promote post-issuance compliance is less likely than an issuer that does not have such procedures to violate the federal tax requirements related to its bonds. More information on the VCAP program can be found on the IRS website in the “Tax Exempt Bond Community” section.
What Issuers Can Do
Issuers seeking to meet the best-practices standard promoted by the IRS would need to develop and adopt comprehensive procedures that meet the requirements described above. The adoption and maintenance of these procedures would enable issuers to be in a position to: (1) "check the box" on the questions relating to post-issuance compliance procedures on the 8038s filed in connection with its bond issues, (2) potentially receive a more favorable resolution if they approach the IRS for a voluntary closing agreement with respect to a violation of tax rules, and (3) potentially be viewed more favorably by the IRS if any of their bonds are ever audited. Once procedures are developed and adopted, of course, they must be effectively implemented. This step would involve training and developing systems to assure continuing awareness of compliance issues.