CHICAGO - The Internal Revenue Service's tax-exempt bond office expects to close about 120 voluntary closing agreements in fiscal 2015 - a figure that would be more than double the 51 closed the previous year, an IRS official said.
Karen Skinder, acting manager of compliance and program management for TEB, provided those numbers on Thursday after a session on post-issuance compliance at the National Association of Bond Lawyers' 40th Annual Bond Attorneys' Workshop here. Skinder talked about the voluntary closing agreement program during that session, and others discussed the program during a session on Wednesday about IRS enforcement.
Under VCAP, issuers can voluntarily settle tax-law problems with their outstanding bonds to preserve the bonds' tax-advantaged status.
"Over the years, the type of the violations that we see has changed somewhat," Skinder said.
In fiscal 2015, which ends Sept. 30, 34% of the cases are due to a change in use or ownership of projects financed with 501(c)(3) bonds, 18% are arbitrage-related violations (probably mostly failed state and local government series securities rollovers) and 17% are due to violations of the private business tests under section 141 of the Internal Revenue Code, she said. Twelve percent of the cases are violations of section 147 of the code, which includes the prohibition on the use of qualified private-activity bonds to finance items such as airplanes and skyboxes and the public approval requirements for PABs, she added.
In 2003, 23% of were due to arbitrage violations, 14% were due to federal guarantees, 14% related to hospital refinancings, 13% were due to a change in use and 11% were due to failed SLGS rollovers, Skinder said.
TEB has not been as successful as it would like to be in getting issuers to adopt post-issuance compliance procedures, according to Skinder. In only 15% of the VCAP cases that are currently open, the violations were discovered using some type of "procedural review," she said. A majority of violations for which issuers requested VCAP settlements were discovered when the bonds were about to be refunded.
Most violations could have been avoided if post-issuance compliance procedures were instituted and followed, Skinder said. Some of the violations the IRS sees are unavoidable, such as when hospital equipment becomes obsolete and is sold, but they could have been detected early enough for issuers to self-correct without having to use VCAP, she said.
"We do continue to encourage issuers to adopt and implement post-issuance compliance procedures," Skinder said. However, the revised Internal Revenue Manual will no longer require procedures to be in writing, because the IRS doesn't want issuers to write procedures for the sake of following an IRS request and then ignore them.
Along with terminating the requirement that post-issuance compliance procedures be in writing, the IRS has terminated the relief given to issuers in VCAP for discovering violations as a result of using those procedures. Issuers weren't using that relief option, Skinder said. Also, if an issuer has procedures that work, they will hopefully still be able to request a VCAP settlement within one year of the violation, which would allow them to get a smaller settlement amount, she said.
Dan Semmens, a partner at Dorsey & Whitney and a moderator of the post-issuance compliance panel, said that the IRS asks issuers to check a box on information returns if they have written compliance procedures. He asks how eliminating the requirement for written procedures relates to the box. Issuers are afraid that if they don't check that box, they will be audited, he said.
Skinder said the forms will be revised, but that changing even one line on a form is "a federal case." She also said TEB has "bigger and badder reasons to come out and visit you rather than you didn't check the box."
TEB will try to work on standard resolutions for VCAP cases when an issuer doesn't discover a tax-law violation until more than a year after it happens, as is common, Skinder said.
During the IRS enforcement panel, tax controversy lawyer Brad Waterman said the existing standards are not very useful when issuers submit VCAP requests more than a year after the time periods specified in the current standards. An audience member said that it can take a while to put together the necessary materials for a VCAP request after a violation is discovered.
Chas Cardall, the moderator of the panel and a partner at Orrick, Herrington and Sutcliffe, said he's found that in cases where violations were discovered years after they happened, but were a type of problem for which there was a resolution standard, the streamlined procedures for the standards were followed, but the penalty amount might have been higher.
Skinder said the IRS wants to get VCAP cases resolved and completed quickly. A number of VCAP cases were allowed to languish in the past, but TEB's goal for fiscal 2016 is to close VCAP cases within six months, she said.
She talked about steps TEB is taking to improve the efficiency of the VCAP process. As part of imminent changes to the IRM, employees will use a two-step review process for VCAP. Before a case is even assigned to a specialist, two people will review a VCAP request to make sure it's complete. That will allow the specialist who becomes assigned to the case to work on the case right away and finish it quickly. In the past, issuers submitted incomplete requests and the IRS didn't discover that there was missing information immediately. The specialist would then have to ask the issuer for additional information, which would take a while for the IRS to receive, Skinder said.
If the IRS needs additional information from an issuer, the issuer will have to provide it within 21 days. Skinder said that in order to move cases quickly, issuers are generally only allowed one 21-day extension to provide the information, but she has had to approve any extensions longer than that.
If a VCAP case isn't closed within 100 days, Skinder will get involved to try to figure out why the case hasn't closed yet and how to move the case along.
Darrell Smelcer, technical advisor to the TEB director, said on an enforcement panel that as part of the efforts to improve efficiency, specialists are more reluctant to stray from standard language in VCAP settlements agreements.
