WASHINGTON — A number of different types of bonds are likely to be audited by the Internal Revenue Service in fiscal 2014 as part of its market segment approach to examinations, an IRS official said Friday.
Rebecca Harrigal, director of the IRS' tax-exempt bond office, gave a rough list of what segments will be examined during the winter meeting of the Government Finance Officers Association's governmental debt management committee.
Under the market segment approach, which began during the last fiscal year, the IRS chooses certain types of bonds to audit and then selects specific bond issues within those segments to examine.
The market segments that TEB thinks it will examine in fiscal 2014 include some of the segments targeted last year, including advance refundings of governmental and 501(c)(3) bonds, tax anticipation revenue notes, small governmental issues, bonds for which 8038-T forms for arbitrage rebate are filed, as well as solid waste and small issue private-activity bonds, Harrigal said.
Other segments to be audited include: direct-pay bonds for which 8038-CP forms are filed; governmental bonds for health, housing and lease-related projects; hospital and other non-profit bonds; and Build America Bonds and qualified school construction bonds, she said.
Harrigal acknowledged that TEB has a "pretty aggressive list given our resources." TEB has seen a decrease in resources and it doesn't look like it's going to get better soon, she said. The market segment approach is being used as TEB is looking to make sure that examinations are focused on areas where there is the biggest risk for noncompliance, she said.
Harrigal said she doesn't expect a significant change in the number of conferences that TEB officials will attend. Additionally, TEB will record its phone forums and put them on the Internet.
She also said that the IRS has created a closing agreement committee with members from the chief counsel's office, the field, and compliance and program management that will look at closing agreements not based on standard settlements to make sure they are legally enforceable. Another committee recently created will review penalties for issuers that make arbitrage rebate payments late.
Vicky Tsilas, associate tax counsel in the Treasury Department, discussed the proposed arbitrage regulations, including those on issue price that have been widely criticized in comments by issuers such as GFOA members and municipal market associations. A public hearing on those proposed rules is scheduled for Wednesday.
"Obviously, the hot topic, the big gorilla in the room is issue price," Tsilas said, adding "We're working through the comments."
Some criticisms of the proposed issue price rules are that they do not distinguish between competitive and negotiated sales, they don't address what happens when a maturity isn't sold, and they are likely to increase issuers' costs. These points will be considered as the IRS and Treasury discuss the proposed rules internally, Tsilas said.
The timeline for the proposed rules following the public meeting is "to be determined," and people with concerns after the public meeting can reach out to Treasury, she said. One complication to moving forward is that the proposed issue price rules were criticized but the other proposed arbitrage rules, about working capital and hedging, were generally favorably received.
Ben Watkins, GFOA debt committee chairman and Florida's bond finance director, said that based on Tsilas' remarks at the meeting, "I think they get it."
Tsilas also described the items on the tax-exempt bond section of the priority guidance plan. These include guidance about allocations for new clean renewable energy bonds, which should be out soon, as well as guidance about the definition of a political subdivision, a variety of private-activity bond issues, temporary relief for declared disasters and regulations about bond reissuance.
Kim Betterton, chair of the post issuance disclosure task force for the National Association of Bond Lawyers, outlined a post-issuance compliance educational piece that NABL and GFOA are working on.
The document will not provide a form for issuers to use, she said. Instead, it will describe various methods of post-issuance compliance that issuers have used and the types of information that needs to be collected and monitored.
A non-public first draft of the document will come out later in February, and the hope is to release the piece to the public before July 1, Betterton said.
