IRS Rewrites the Internal Revenue Manual Section on Closing Agreements for Tax-Advantaged Bonds
You have been waiting all weekend to hear the news, so we will get straight to the point. It took three years, but the IRS finally corrected the brain-melter that we posted a few days ago, making fairly comprehensive changes to Part 4, Chapter 81, Section 6 of the Internal Revenue Manual (IRM 4.81.6), titled “Closing Agreements,” on February 20, 2019. Exciting, is it not?
As we’ve discussed before, the Internal Revenue Manual provides detailed rules for calculating the taxpayer exposure that must be paid on an issue that is taken into VCAP or that is ensnared in an audit that reveals a problem with the bonds. Once the issuer calculates the taxpayer exposure amount for each affected year, the issuer must be future-valued forward in time or present-valued back in time to the date on which the issuer enters into a closing agreement with the IRS to fix the problem with the bonds.
The IRS rewrote the example from the weekend into the imperative mood, making it somewhat less incomprehensible.
- “A closing agreement expected to be executed on November 15, 2018, includes amounts corresponding to tax-exempt interest to be paid in future tax years 2018 through 2028.
- Present value the amounts representing estimated tax payments due on the assumed April 15 tax payment dates for tax years 2018 through 2020 at the short-term AFR.
- Present value the amounts assumed to be due on the April 15 tax payment dates for tax years 2021 through 2026 at the mid-term AFR.
- Present value the amounts assumed to be due on the April 15 tax payment dates for tax years 2027 and 2028 at the long-term AFR.
- Use the applicable AFRs in effect on November 15, 2018 for these present value computations.” (IRM 18.104.22.168.3.9 (02-20-2019))
The other changes made to IRM 4.81.6 are shown on a redline that we made for you, which you can access here.
It may be easy to be caught up in the weeds when perusing through the redline comparison of the changes. Thankfully, the IRS highlighted eight material changes in the cover memo pasted atop the new provisions. The cover memo describes the changes as follows:
- Made editorial changes throughout the IRM and updated IRM and Revenue Procedures references.
- Modified IRM Section 22.214.171.124 (previously Section 126.96.36.199) by changing the members of the ITG/TEB Closing Agreement Committee.
- Changed the procedures to determine closing agreement resolution amounts and the review and clearance process for closing agreements.
- Added plain language edits to comply with the Plain Writing Act of 2010.
- Updated the manual to reflect ITG/TEB organizational changes.
- Updated closing agreement procedures to align with the internal controls process (IRM 1.11.2).
- Updated the computation of taxpayer exposure in IRM 188.8.131.52.3.1 to correspond with Interim Guidance on Closing Agreements for Tax-Exempt Bonds, TE/GE-04-0718-0017 (we discussed this Interim Guidance here).
- Moved references to the Voluntary Closing Agreement Program (VCAP) to IRM 7.2.3.
This last point – point number 8 – was facilitated by additional edits that the IRS made to Section 7.2.3 in December of last year.
Please note that the changes made to IRM 4.81.6, Closing Agreements, supersede the prior version of IRM 4.81.6 dated January 28, 2016.
Here is an official version of the updated IRM 4.81.6, Closing Agreements
 Relatively speaking. Also, although the heading of the example is now “Examples,” it is in fact just a single example. Nothing is ever easy, is it?