Issuers of tax-advantaged bonds should be offered a simpler and faster system of making self-corrections with the Internal Revenue Service under alternatives to its expensive and time-consuming Voluntary Closing Agreement Program.
That’s the essence of the recommendation of the IRS Advisory Council that delivered its
Rettig and other top IRS officials met with the council in Washington to hear a wide range of recommendations on topics ranging from electronic filing, to small business issues and a new Form W-4.
Among the IRS officials attending was Tammy Ripperda, the new commissioner for Tax Exempt and Government Entities.
Ripperda said she was impressed by the breadth of her unit’s responsibilities when she assumed her post. “I didn’t even know what a tax-exempt bond was in August of this year,” she said.
TEGE’s goals are improving compliance, including voluntary compliance, and enforcement as well, said Ripperda, noting that “if we can’t root out those who intentionally violate” the tax laws, it will challenge the integrity of the entire system.
In the public finance arena, the council suggested the VCAP program would remain in place for issuers who need a legally binding agreement, but it would become the third tier of a system that would offer two simpler options.
The VCAP program has seen a dramatic drop in filings over the last several years.
“The written VCAP program can necessitate an issuer spending between $20,000 and $60,000 or more on attorney’s fees,” the report said. “Over 49% of VCAP cases over the last five years took longer than 180 days to resolve and over 75% of cases took 90 days or more for resolution.
The report said that issuers have disclosure responsibilities that may require a quick resolution to protect bondholders and the public.
Carol Lew, a shareholder of Stradling Yocca Carson & Rauth in Newport Beach, California who is a former president of the National Association of Bond Lawyers, summarized her subgroup’s recommendations at the meeting.
Lew noted that the IRS priority guidance for 2019-2020 includes making improvements in the self-correction program for tax-advantaged bonds.
Lew’s group suggests that a level 1 self-correction be offered that doesn’t require IRS approval “for certain insubstantial and unintentional violations provided a written notice is provided.”
“The notice should be simple, briefly identifying the applicable bond issue, the error type, the remediation taken, and the existence of issuer corrective actions to monitor and prevent reoccurrence of the error.” The report said. “We strongly suggest that the IRS provide the form to be filed for the notice.”
A level 1 response would be made by the IRS within two weeks.
The council gave as an example of a level 1 filing the failure by an issuer to invest in zero interest State and Local Government Securities known as SLGS to reduce the yield on an escrow investment. The council said the remediation “might be the appropriate yield reduction payment.”
A level 2 self-correction also would involve a streamlined process with a “normally automatic IRS confirmation letter, without necessarily an IRS review, that the violation is considered corrected if the issuer has satisfied specified criteria,” the report said.
“We recommend that the submission for level 2 be simple, utilizing a form that is, although streamlined, more lengthy than the level 1 postcard-type notice suggested,” said the report.
If there is a level 2 review, the council recommends it be conducted by a Tax Exempt Bonds specialist without other layers of review under normal circumstances.
Confirmation letters should ordinarily be received within two weeks, but it should not be considered a voluntary closing agreement.
“We recommend that level 3 self-correction be through the negotiated VCAP to address less common fact patterns or more egregious situations,” the report said. “Because an issuer might want or require a binding closing agreement, we suggest that issuers have the option to utilize level 3 despite potential applicability of levels 1 or 2.”
The council recommended that all three levels should encourage issuers to identify and correct violations early.
In addition, the council recommended “cash payment remediation that is significantly less than the liability as a result of an audit and that is scaled to encourage early correction will facilitate self-correction in an efficient manner.”
