New Au­dits Get Mixed Re­views

The Bond Buyer - - Front Page - BY BRIAN TUMULTY AND LYNN HUME

CHICAGO – In­ter­nal Rev­enue Ser­vice staffing for tax-ex­empt bond ex­am­i­na­tions has shrunk dra­mat­i­cally, lead­ing the agency to stream­line its au­dit process in ways that some lawyers ap­plaud and oth­ers don’t like.

Speak­ing on a panel at the Na­tional As­so­ci­a­tion of Bond Lawyers’ Bond At­tor­neys’ Work­shop here, Allyson D. Bel­some, field of­fi­cer man­ager for tax-ex­empt bonds (TEB) at the IRS, said her group cur­rently has 26 agents, three group man­agers, two sup­port staff and no tech­ni­cal ad­viser.

Bel­some, Allyson Bel­some Cau­tion­ing that she was speak­ing per­son­ally and not for the IRS, she noted that that is far less than in 2009 when the TEB Of­fice had 60 agents, six man­agers, five sup­port staff, and tech­ni­cal ad­viser.

The num­ber of agents con­duct­ing ex­ams will shrink fur­ther to 19 by June of 2018 be­cause of ex­pected re­tire­ments and no plans to hire any­one to fill those po­si­tions, Bel­some said. That means the group will be less than a third of its for­mer size.

Bel­some did not talk about

the rea­son for the fund­ing and re­source cuts. But over­all IRS staffing has been cut sig­nif­i­cantly over the last six years be­cause of fund­ing re­duc­tions by the Repub­li­can-con­trolled Congress.

Repub­li­cans grew an­gry af­ter ac­cus­ing the IRS of try­ing to tar­get and take away the tax-ex­empt sta­tus of con­ser­va­tive groups and have re­peat­edly called for the res­ig­na­tion of IRS Com­mis­sioner John Kosk­i­nen.

Some NABL mem­bers at the meet­ing were up­set that IRS agents have no spe­cific tech­ni­cal sup­port per­son ad­vis­ing them on au­dits of tax-ex­empt bonds.

“This is a com­plex area and to not have good tech­ni­cal sup­port for the field agents, it’s go­ing to lead to very in­con­sis­tent re­sults” in ex­am­i­na­tions, said Chaz Cardall, a part­ner at Or­rick, Her­ring­ton & Sut­cliffe in San Fran­cisco.

In May, the tax-ex­empt bond of­fice was com­bined with the of­fice of In­dian tribal gov­ern­ments to form a new ITG/TEB of­fice within the Tax Ex­empt & Gov­ern­ment En­ti­ties Divi­sion (TEGE).

The new ITG/TEB of­fice within TEGE is man­aged by Christie Ja­cobs, who pre­vi­ously man­aged ITG. As a re­sult, there is no stand­alone TEB Of­fice any more. Ja­cobs has no pre­vi­ous muni ex­pe­ri­ence.

Bel­some said the IRS had a choice of ei­ther con­duct­ing fewer ex­am­i­na­tions be­cause of the re­duc­tions in staff or mov­ing to a dif­fer­ent ex­am­i­na­tion process.

“Although our staffing has been re­duced, our au­dit cov­er­age has not,” Bel­some told The Bond Buyer in an in­ter­view.

The TEB Of­fice used to de­cide what ex­am­i­na­tions it wanted to con­duct and what the scope of those ex­am­i­na­tions would be. Now a Com­pli­ance Plan­ning and Clas­si­fi­ca­tion Of­fice (CP&C) that op­er­ates across the board for all ar­eas of TEGE does that. The tax-ex­empt bond folks have some in­put to help fine-tune what’s un­der con­sid­er­a­tion, Bel­some said.

CP&C is select­ing new ex­am­i­na­tions as part of a com­pli­ance strate­gies and data driven re­view of cer­tain types of bonds rather than by ran­dom se­lec­tion.

IRS reg­u­la­tions re­quire that first con­tact with a tax­payer must be by let­ter be­cause of con­cerns the agency has about iden­tity theft. IRS agents also are us­ing only one for­mat for their ini­tial con­tact letters to is­suers in­stead of the four for­mats it for­merly used, said Bel­some, whose field of­fice is lo­cated in nearby sub­urb of Down­ers Grove, Ill.

Re­cently TEGE re­leased its com­pli­ance strate­gies for fis­cal 2018. It in­cluded com­pli­ance with: ar­bi­trage re­quire­ments for tax-ad­van­taged bonds with guar­an­teed in­vest­ment con­tracts and qual­i­fied hedges and in­vest­ments be­yond the per­mit­ted thee-year tem­po­rary pe­riod; the re­ha­bil­i­ta­tion re­quire­ment for pri­vate ac­tiv­ity bonds used for ac­qui­si­tion fi­nanc­ings; re­me­dial ac­tions taken when bond-fi­nanced fa­cil­i­ties have an ex­ces­sive amount of pri­vate use; and deep dis­count bonds and PABs that have ex­ces­sive weighted av­er­age ma­tu­ri­ties.

“That’s look­ing at bonds where we think there’s a po­ten­tial for an is­suer there,” said Bel­some. “We will iden­tify re­turns where there’s in­for­ma­tion re­ported … that is an in­di­ca­tor of po­ten­tial non­com­pli­ance.”

By re­turns she’s means the 8038 and 8038-G forms that is­suers file when they is­sue gov­ern­men­tal or pri­vate ac­tiv­ity bonds con­tain­ing in­for­ma­tion about those bond is­sues. Bel­some stressed that it’s very im­por­tant that those re­turns be filled out cor­rectly.

“It’s go­ing to be a driver of how that ex­am­i­na­tion is go­ing to be con­ducted largely,” she said, adding, “It sets the tone for the ex­am­iner” and the scope of the exam.

Most of these au­dit top­ics are fo­cused on a spe­cific, lim­ited is­sue, she said, but some like the one on deep dis­count bonds, are fo­cused on struc­ture. The IRS agent wants to know, “Is that mar­ket-driven or some­thing else,” asked Bel­some, adding, is it part of an ar­bi­trage play?

There are also data-driven exam top­ics that fo­cus on in­for­ma­tion in the bond forms plus other in­for­ma­tion like that on an is­suer’s web­site or Form 990s and sched­ule Ks filled out by non­prof­its.

Bel­some stressed that it is ex­tremely im­por­tant for an is­suer or its lawyer to com­mu­ni­cate with IRS ex­am­in­ers as soon as pos­si­ble af­ter the is­suer re­ceives a let­ter in­form­ing of it of an au­dit but be­fore the is­suer re­sponds to an in­for­ma­tion doc­u­ment re­quest (IDR). She said IRS ex­am­in­ers don’t want to waste their time do­ing an au­dit if there is no prob­lem with com­pli­ance or if they find, for ex­am­ple, that when plan­ning to au­dit re­fund­ing bonds the bonds to be re­funded were al­ready au­dited.

At that point they will de­cide not to do the au­dit.

Ear­lier this year, Su­nita Lough, Com­mis­sioner of the TEGE divi­sion, told lawyers at a NABL meet­ing that an is­suer would re­ceive a let­ter in­form­ing it about an ex­am­i­na­tion and then the is­suer and/or its lawyer would call the IRS agent to talk about the bonds and po­ten­tial is­sues and that would de­ter­mine what doc­u­ments the agent re­quests in the IDR.

But some tax con­tro­versy lawyers said that the whole idea of a lot of com­mu­ni­ca­tion is com­pletely counter to their ex­pe­ri­ence. They also said there are in­con­sis­ten­cies be­tween what IRS of­fi­cials are say­ing, what the In­ter­nal Rev­enue Man­ual says for agents, and what is hap­pen­ing in prac­tice by IRS agents.

Cardall said that in one of his au­dits, he or the is­suer reached out to the IRS agent about 20 times and never heard back ex­cept for one re­turn call at mid­night.

They then reached out to the IRS agent’s man­ager and were told there is not sup­posed to be any in­ter­ac­tion be­tween the is­suer and agent and that all com­mu­ni­ca­tion should be in writ­ing.

But Carol Lew, a share­holder at Stradling Yocca Carl­son & Rauth in New­port News, Calif., said, “It’s won­der­ful” that the IRS is try­ing to tar­get its au­dits and wants agents to com­mu­ni­cate ear­lier with is­suers. She said she has been in two au­dits where the agents were happy to talk to her.

An­other change is that, in the past, an IRS agent would send an IDR to an is­suer and then, af­ter some dis­cus­sions, send a more tar­geted IDR to the is­suer that drilled down on the tax is­sues in dis­pute.

Bel­some said is­suers are no longer go­ing to get “ad­verse IDRs.” That means the first doc­u­ment that the is­suer gets from the IRS show­ing the agency has found tax prob­lems is Form 5701, a No­tice of Pro­posed Is­sue that sug­gests there is non­com­pli­ance and that the bonds may be tax­able.

“At that point, they’ve kind of dug in their heels,” said Cardall re­fer­ring to the IRS agent.

This also raises dis­clo­sure is­sues for is­suers and their lawyers. Some is­suers and their dis­clo­sure coun­sel be­lieve they must dis­close over the Mu­nic­i­pal Se­cu­ri­ties Rule­mak­ing Board’s EMMA sys­tem that the is­suer has re­ceived a No­tice 5701 from the IRS. They didn’t have that view when the is­suer got an IDR from the IRS.

To the sur­prise and dis­may of some lawyers in the au­di­ence, Bel­some said that once an is­suer sends doc­u­ments to an IRS agent in re­sponse to an IDR, that agent can no longer de­cide not to ex­am­ine the bonds.

She called it a “tax­payer fair­ness” is­sue. She said if is­suers send in doc­u­ments they ex­pect the IRS to de­cide if there’s a tax is­sue to en­sure the IRS won’t come back later and ask for the same doc­u­ments and start the whole process all over again.

This means is­suers should get lawyers in­volved right away when­ever they re­ceive a let­ter and an IDR from the IRS, NABL mem­bers said.

The lawyer may be able to con­vince the agent that there is no tax is­sue with the bonds, or that the agent is bark­ing up the wrong tree.

“You need to have a lawyer on that call” with the IRS, Cardall said.

“Hav­ing coun­sel is very im­por­tant,” said Lew.

Bel­some also said that in some cases if is­suers re­deem bonds that will re­solve IRS con­cerns about tax prob­lems.

The IRS “should be ap­plauded” for us­ing their re­sources more ef­fi­ciently and for show­ing def­er­ence to is­suers,” Lew said. ◽

“Although our staffing has been re­duced, our au­dit cov­er­age has not,” said Allyson Bel­some, IRS field op­er­a­tions man­ager for tax-ex­empt bonds.

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