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Office of Tax Exempt Bonds Role of the Internal Revenue Service’s Office of Tax-Exempt Bonds

Office of Tax Exempt Bonds Role of the Internal Revenue Service’s Office of Tax- Exempt Bonds

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Office of Tax Exempt Bonds

Role of the Internal Revenue Service’s Office of Tax-Exempt Bonds

Office of Tax Exempt Bonds

Role of the Internal Revenue Service’s Office of Tax-Exempt Bonds

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TEB Organization

Steve Chamberlin

(Acting) Director TEB

Allyson Belsome Bob Griffo

Program Manager (Acting) Program

Field Operations Manager CPM

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Compliance and Program Management

• TEB Compliance and Program Management responsibilities:

• Coordination with Referral Committee• Voluntary Closing Agreement Program (VCAP)• Outreach Program• Updating IRM and other procedures• Coordination with Counsel • Technical issue development• Quality review of closed examination cases• Questionnaires and surveys• Classification

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TEB Policy: Resolution of Violations

It is the continuing policy of the Service to

attempt to resolve violations of the Code at

the issuer level without taxing

bondholders.

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Voluntary Closing Agreement Program (VCAP)

• Purpose: The primary purpose of VCAP is to

encourage issuers, conduit borrowers, and

other parties to bond transactions to exercise

due diligence and to correct any issuance

and post-issuance violations of the

applicable sections of the Internal Revenue

Code.

• VCAP has been expanded to include tax

credit bonds.

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VCAP Resolution Standards

• The IRM contains resolution standards for

certain identified violations (“Streamlined

VCAP”), including:

• Failure to provide notice of defeasance;

• Impermissible advance refunding; and

• Failure to timely reinvest proceeds into 0%

SLGS.

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Questionnaires and Market Segment Surveys

• Purpose: Gather data regarding the

practices and procedures of issuers

regarding record keeping and monitoring

of the rules applicable to their financings.

• Allows TEB to monitor compliance trends

for the purpose of designing proactive

education and outreach products for use

by TEB Customers.

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Classification

• The process by which returns are selected for examination.

• Classification attempts to include financings that address:• Key areas identified through examinations and compliance check

project initiatives;

• Market segment risk assessment; and

• Annual Work Plan criteria.

• Classified returns are either:• Examined by CPM staff or

• Examined by Field Operations

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Field Operations

• Examinations are conducted at the issuer level, consistent with the continuing policy to attempt to avoid taxing individual bondholders.

• Field Operations personnel located throughout the country conduct comprehensive and limited scope examinations, and assist in the delivery of outreach to the bond community.

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Field Operations

• TEB Field Operations is responsible for:

• is primarily responsible for identifying and correcting noncompliance with Federal tax laws applicable to tax-advantaged bonds. 

• The FO office conducts examinations, with fairness and the highest level of integrity, at the issuer level.   The goal of the program is to pro-actively assist issuers in their tax-advantaged bond compliance with the Federal tax laws.  

• FO concentrates its efforts on the many emerging issues and focus areas in the tax-advantaged bond community.

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Examinations

• As part of TEB’s general program work,

the Field:

• Conducts comprehensive examinations of

a wide variety of governmental and private

activity bonds

• Seeks to resolve identified violations

through closing agreements.

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Examinations

• The primary objective of a TEB

examination is to determine if the bond

issuance is in compliance with the

qualification provisions of the Internal

Revenue Code.

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Examinations

• In a tax-advantaged bond examination the Issuer of the bonds is considered the “taxpayer,” so the burden of maintaining and producing adequate records necessary to conduct a quality examination is on the Issuer.

• In the examination of a private activity bond many records are often secured from the Conduit Borrower, and sometimes from other parties to the transaction. However, they are considered third parties in a tax-exempt bond examination.

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Examinations

• Under the provisions of IRC section 6103, the Service may contact third parties to obtain information.

• Generally, contacts with third parties are made when the Service is unable to obtain the information from the issuer or to verify information provided by the issuer.

• IRC 7602(c) requires the IRS to:• Provide advance notice to the taxpayer that third party contacts

may be made. • Periodically provide a list of all third party contacts to the taxpayer. • Provide a list of third party contacts to the taxpayer upon request.

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Examinations

• At the inception of the examination, the issuer is notified in writing of the initiation of an examination of an identified financing.

• The letter may indicate how the return was selected for examination and will detail the required items for the examination. We may, however, request additional items at a later date.

• The examination may include a comprehensive review of the municipal debt issuance, or focus on specific aspects.

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Examinations

• During the course of an examination, TEB seeks to identify and resolve issues as expeditiously as possible

• Issues may be resolved without the issuance of a formal report, or subsequently thereafter

• Violations are resolved through a closing agreement with the issuer and may include other parties to the transaction

• Resolution of violations through closing agreements• Includes negotiated terms that typically include

• payment of a settlement amount and/or• redemption of bonds

• Consider, in part, the due diligence of issuers and their representatives to act in good faith to resolve violations in a timely manner.

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Examinations

• Failure to resolve an identified violation through a closing agreement results in:• The issuance of a Form 5701 (if not previously issued)

• A proposed adverse letter

• Pursuant to the issuance of a proposed adverse letter, the issuer may request the matter to be considered by the Office of Appeals

• Failure to timely request an appeal will result in the issuance of a final adverse letter pursuant to which the interest on the bonds is includible in the gross income of bondholders (or a credit is not allowable.)

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Examinations of Advance Refunding Bonds

• One of the key audit aspects of an advance

refunding issue is to determine that the yield

on the escrow fund is not more than .001%

above the bond yield of the refunding bonds.

• To ensure such compliance, requested

documentation typically includes:

• The Verification Report,

• Investment records, and

• Proof of securities purchased to fund the escrow.

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Examinations of Advance Refunding Bonds

• The focus of any advance refunding bond

examination is largely driven by the

funding of the escrow fund:

• SLGS,

• Open Market Securities, or

• A combination of both (0% rollover SLGS).

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Examinations of Advance Refunding Bonds

• SLGS-funded escrows:• Focus on verification that the issuer in fact

purchased what was depicted in the Verification Report.

• Escrows with open market securities:• Same as above, but with additional consideration

to the purchase of the securities at fair market value.

• Escrows requiring reinvestment into 0% SLGS:• Verify the reinvestment occurred timely.

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Examinations of Advance Refunding Bonds

• Violations resulting from the failure to

reinvest timely in 0% SLGS that result in a

yield on the escrow fund that is higher than

the yield on the refunding bonds.

• VCAP offers a standardized resolution for

this violation and may be on more

favorable terms than a violation identified

in an exam.

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VCAP Resolution Standard

• For this purpose, proceeds held by the trustee due to this reinvestment failure may be treated as invested at the applicable federal funds rate (AFFR)

• Trustee certifies that• Its customary practice is to invest its overnight balances at

a rate which approximates the AFFR

• the proceeds were likely invested in such a manner

• Certificate is required even if trustee is not a party to the VCAP

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Yield Restriction Compliance when SLGS Window is Closed

• Generally, the proposed Treasury

Regulations (into which an issuer may

elect) allow an issuer to make a yield

reduction payment for investments

purchased when the SLGS window is

closed.

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Whistleblower/Fraud/6700

• TEB continues to address referrals from

the Whistleblower Office and the

application of section 6700 penalties and

fraud considerations when warranted.

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Whistleblower

• In 2006, legislation was enacted establishing

the Whistleblower Office such that previously

existing Code section 7623 was re-

designated as section 7623(a) and a new

section (b) provision was added.

• Primary difference between “a” and “b” is

that b claims are those for which the amount

of tax due is over $2M and includes “Taint

analysis.”

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Fraud and 6700

• In all examinations, consideration is given

to the potential for fraud and whether the

application of the Code section 6700

penalty is appropriate.

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Fraud and 6700

• Section 6700 is applicable to any person who:• organizes or assists in organizing• and makes or furnishes (or causes another person

to make or furnish) certain statements, including statements regarding exclusion of income and allowability of credits

• and for which the person knows or had reason to know such statement was false or fraudulent as to any material matter,

• shall pay a penalty of 50% of the gross income derived from the activity.

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Fraud and 6700

• Fraud involves a willful attempt.

• Section 6700 is not a fraud penalty.

• Section 6700 requires that the person knows

or should have known that the statements

were false or fraudulent.

• It is not necessary that a determination be

made that bonds do not qualify as a tax

advantaged bond in order to assert a penalty.

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Areas of Focus

• TEB general program work and other

project work ensures a broad coverage

of compliance matters.

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Areas of Focus

• Recent examples of areas of focus

include:

• Abusive Transactions

• Post Issuance Compliance

• Arbitrage

• Governmental and Charitable Financings

• Direct Pay Bonds

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Post Issuance Compliance

• Post Issuance Compliance is an area of

focus for TEB in exam, VCAP, Outreach

and all other TEB activities.

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Limited Scope Exams

• Project initiatives can take the form of a

limited scope examination.

• Limited scope examinations can be

expanded to a more comprehensive

examination if it is deemed warranted by

the examining agent and approved by the

Group Manager.

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Limited Scope Exams

• Examples of current and future limited

scope examinations include:

• Advance Refundings

• TRANs/RANs/BANs

• Small Governmental Issues

• 8038-T Examinations

• Solid Waste

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Customer Satisfaction

• A new web based customer satisfaction

tool is being developed to monitor

customer satisfaction on closed TEB

examination cases.

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Department of the Treasury

Internal Revenue Service

www.irs.gov