Data-Based IRS Au­dits For Mu­nis

The Bond Buyer - - Front Page - By Brian tu­multy

– In 2018 the In­ter­nal Rev­enue Ser­vice will rely on a new data driven ap­proach for au­dit­ing mu­nic­i­pal bonds, while fo­cus­ing on sev­eral reg­u­la­tory is­sues.

That’s the pre­dic­tion from bond at­tor­neys, muni mar­ket groups and and the di­rec­tor of the re­cently con­sol­i­dated IRS en­force­ment of­fice that han­dles au­dits of both tax ex­empt bonds and In­dian tribal gov­ern­ments.

The mu­nic­i­pal bond mar­ket went through a roller coaster in 2017 that cul­mi­nated in a new tax over­haul law that ter­mi­nates ad­vance re­fund­ings and tax credit bonds as of Dec. 31 without any tran­si­tion rules to de­lay the ef­fec­tive date that had been sought by mar­ket par­tic­i­pants.

“If you look at ad­vance re­fund­ings all they have to do is strike through the code. It’s done,” said Emily Brock, di­rec­tor of the Fed­eral Li­ai­son Cen­ter of the Gov­ern­ment Fi­nance Of­fi­cers As­so­ci­a­tion. “Un­for­tu­nately I think there are a lot of tech­ni­cal points that weren’t ad­dressed in the fi­nal tax leg­is­la­tion that may need greater fo­cus.”

From an en­force­ment stand­point, ter­mi­nat­ing ad­vance re­fund­ings and tax credit bonds means “there will be less for the IRS to look at” in 2018, Ed Oswald, a tax part­ner at Or­rick Her­ring­ton & Sut­cliffe in Wash­ing­ton, dryly ob­served.

On the reg­u­la­tory front, the lat­est IRS pri­or­ity guid­ance tar­gets an up­date on reg­u­la­tions for bond reis­suance, guid­ance on re­me­dial ac­tions and fi­nal­iza­tion of the long-awaited up­dated rules that the IRS and Trea­sury is­sued Sept. 28 on the no­tice and ap­proval re­quire­ments for pri­vate ac­tiv­ity bonds un­der the Tax Eq­uity and Fis­cal Re­spon­si­bil­ity Act.

Bond reis­suance is a timely topic be­cause reis­suances will rise with the ter­mi­na­tion of adWASHINGTON

vance re­fund­ings, sev­eral lawyers said.

“I sus­pect that we’re go­ing to need clarifications on what is needed or not needed to cause a reis­suance,” said Perry Is­rael, a bond at­tor­ney based in Sacramento, Calif. who is on the board of the Na­tional As­so­ci­a­tion of Bond Lawyers.

He fore­sees “a num­ber of “Cin­derella bond” struc­tures in which tax­able bonds are changed into tax-ex­empt bonds as a method of re­plac­ing ad­vance re­fund­ings.


“Also, there will be a lot of in­ten­tional reis­suances as banks try to keep their cus­tomers. Many di­rect place­ments with banks have been writ­ten with ‘gross up’ lan­guage that would in­crease the rate on the bonds if the after tax value is re­duced to the bank,” Is­rael said.

“This means that if the bank’s tax rate re­duces, the rate on the bonds would go up,” he said. “With the re­duc­tion in cor­po­rate tax rates that could be very costly and banks are go­ing to want to change those ad­just­ments to keep those cus­tomers.”

Rich Moore, a part­ner at Or­rick Her­ring­ton & Sut­cliffe in San Fran­cisco who is also a NABL board mem­ber, said it isn’t clear whether the IRS will break new ground on reis­suance rules.

“I don’t know whether this new guid­ance would go in a reg­u­la­tion or be in a no­tice that would su­percede the oth­ers,” Moore said. “At a min­i­mum, what it is go­ing to do is just take the ex­ist­ing guid­ance on reis­suance rules for tax ex­empt bonds and put them in one place.”

Bond at­tor­neys also are uncer­tain whether the new TEFRA rules will re­main in “pro­posed” sta­tus for the in­def­i­nite fu­ture or be fi­nal­ized this year.

IRS spokesman Dean Pat­ter­son said his agency “gen­er­ally does not dis­cuss the tim­ing of fu­ture guid­ance or reg­u­la­tions.”

Moore said he’s “op­ti­mistic they can be fi­nal­ized be­cause they got the pro­posed reg­u­la­tions un­der the Trump ad­min­is­tra­tion and they are user friendly.”

The pro­posed rules take into ac­count tax law changes that have ex­panded the kinds of pri­vate ac­tiv­ity bonds that can be is­sued and tech­no­log­i­cal changes that have oc­curred since 1983 such as the In­ter­net and elec­tronic com­mu­ni­ca­tions.

TEFRA es­tab­lished the pub­lic no­tice and ap­proval re­quire­ments for PABs in 1982 be­fore the PAB cat­e­gories were ex­panded.

The tax re­form leg­is­la­tion re­cently ap­proved by Congress left PABs un­touched so the need for the up­dated TEFRA rules re­mains.

The re­me­dial ac­tion rules need an up­date, Oswald said.

Th­ese are rules on ac­tions that is­suers can take to re­me­di­ate cer­tain tax law or rule vi­o­la­tions for tax-ad­van­taged bonds, which in­clude tax-ex­empt, tax­able di­rect-pay, and tax­able tax-credit bonds.

“It’s still dif­fi­cult eco­nom­i­cally to get ei­ther pri­va­ti­za­tions or P3 trans­ac­tions done un­der the cur­rent re­me­dial ac­tion rules,” Oswald said.

On the en­force­ment side, the IRS ex­pects to close 577 au­dits in the tax ex­empt bond of­fice in fis­cal 2018, which be­gan on Oct. 1, 2017 and ends on Sept. 30, 2018.

That’s sig­nif­i­cantly down from the 717 closed in fis­cal 2017 but slightly higher than the 570 con­cluded in fis­cal 2016 and the 569 in fis­cal 2015.

The IRS does not of­fer pro­jec­tions for how many vol­un­tary agree­ment pro­gram cases it will close in fis­cal 2018, but the trend has been a de­cline from 122 in fis­cal 2015 to 67 in 2016 and 44 in 2017.


The IRS 2018 work plan for Tax Ex­empt and Gov­ern­ment En­ti­ties pub­licly released Sept. 28 lists “hedge ter­mi­na­tions; eco­nomic life and weighted av­er­age ma­tu­rity (WAM); safe har­bors for guar­an­teed in­vest­ment con­tracts; and rules for qual­i­fied hedges” as ar­eas for ex­am­i­na­tion for its new data-driven Knowl­edge Man­age­ment unit.

The 2018 work plan lists five ar­eas to fo­cus on as part of its com­pli­ance strat­egy:

Ar­bi­trage of tax-ad­van­taged bonds with guar­an­teed in­vest­ment con­tracts and/or qual­i­fied hedges as well as bonds with in­vest­ments be­yond a tem­po­rary pe­riod; ac­qui­si­tion fi­nanc­ing in­volv­ing pri­vate ac­tiv­ity bonds to de­ter­mine whether the re­ha­bil­i­ta­tion re­quire­ment was sat­is­fied; non-qual­i­fied use in the dis­po­si­tion of fi­nanced fa­cil­i­ties and/or ex­ces­sive pri­vate busi­ness use; bonds is­sued with a deep dis­count; and pri­vate ac­tiv­ity bonds with ex­ces­sive weighted av­er­age ma­tu­ri­ties.

Christie J. Ja­cobs, who took over the con­sol­i­dated of­fices of Tax Ex­empt Bonds and In­dian Tribal Af­fairs in May, told The Bond Buyer in a mid-De­cem­ber in­ter­view that she doesn’t have any new com­pli­ance con­cerns for 2018.

Ja­cobs, who has worked for the IRS for more than 28 years, headed the ITG of­fice since its cre­ation in 2000. She started work­ing at the IRS as an in­tern while at­tend­ing the Columbus School of Law at Catholic Univer­sity.

She re­ceived her un­der­grad­u­ate de­gree from Vas­sar Col­lege and is a Maine na­tive who now lives in Colorado.

The re­or­ga­ni­za­tion to a com­bined ITG/TEB of­fice came as an ef­fi­ciency move against the back­drop of a con­tin­u­ing wave of re­tire­ments that has re­duced the work­force and re­duced fund­ing from Congress.

The TEB op­er­a­tion is ex­pected to have only 19 agents con­duct­ing ex­ams by June of 2018, down from 23 at the Oct. 1 start of the fis­cal year.

In 2009 the of­fice had 60 agents, six man­agers, five sup­port staff, and tech­ni­cal ad­viser.

“Be­cause there are fewer peo­ple, they will spend less time fig­ur­ing out where to fo­cus their work and they will be given cases elec­tron­i­cally,” Ja­cobs said. “There’s go­ing to be com­pli­ance strate­gies de­vel­oped based on data and we will go take those com­pli­ance strate­gies and do au­dits on those.”

Ja­cobs said the ITG/TEB of­fice is us­ing a data driven, cen­tral­ized ap­proach to de­cid­ing when to con­duct ex­am­i­na­tions.

“This is for all of our di­vi­sions, just to be clear, but it’s also for the tax ex­empt bond work as well,” she said.

One area not tracked by the IRS is states’ com­pli­ance with their pri­vate ac­tiv­ity bond vol­ume caps. “I don’t think that’s gen­er­ally our func­tion,” Ja­cobs said.

“I know there have been in­dus­try con­cerns about keep­ing track of those vol­ume caps and I know we’ve looked some at what the states do to keep track of their own vol­ume caps and I don’t think we found those ap­proaches lack­ing.”

Carol Lew, past pres­i­dent of NABL and a share­holder at Stradling Yocca Carl­son & Rauth in New­port Beach, Calif., thinks the new muni au­dit process, which en­cour­ages com­mu­ni­ca­tion be­tween is­suers, their lawyers and au­di­tors as soon as pos­si­ble after the IRS no­ti­fies the is­suer of an au­dit, is “making head­way.”

The net ef­fect the new ap­proach, Lew said, is that if a mu­nic­i­pal is­suer is au­dited “it doesn’t nec­es­sar­ily mean there’s a prob­lem with their deal.” In­stead, the trans­ac­tion might come un­der an area the IRS has tar­geted for ex­am­i­na­tions.

One ex­am­ple is that the 2018 work plan is fo­cus­ing on multifamily hous­ing projects that in­volve ex­ist­ing hous­ing to de­ter­mine if deals com­plied with the re­ha­bil­i­ta­tion re­stric­tion.

“The is­suers may see be a more indepth au­dit in­stead of a sum­mary,” Lew said.

Tech­ni­cal points that weren’t ad­dressed in tax law “may need greater fo­cus,” said Emily Brock of the Gov­ern­ment Fi­nance Of­fi­cers As­so­ci­a­tion

Re­me­dial ac­tion rules need an up­date, said Ed Oswald at Or­rick Her­ring­ton & Sut­tl­ciffe.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.