The Internal Revenue Service (Service) is taking action to ensure compliance with all postissuance requirements relating to the federal tax exemption of interest on Qualified 501(c)(3) Bonds issued on behalf of section 501(c)(3) organizations. After examining the results of its recent targeted surveys of 501(c)(3) borrowers, the Service found “significant noncompliance with recordkeeping and record retention requirements relating to tax-exempt bonds issued by or for the benefit of section 501(c)(3) borrowers.” As a result, the Service has announced that it intends to take the following actions:
- Increase its audit efforts to enforce compliance by 501(c)(3) borrowers with all postissuance requirements relating to the federal tax exemption of interest on bonds;
- Impose upon 501(c)(3) borrowers new annual reporting requirements with respect to their outstanding tax-exempt bonds; and
- Increase its efforts to educate 501(c)(3) borrowers with respect to their post-issuance compliance issues.
Enforcement – New Compliance Surveys
The Service’s Tax Exempt Bond (TEB) and Exempt Organizations Compliance Area (EOCA) have recently initiated a joint effort to evaluate the policies and procedures used by 501(c)(3) borrowers to ensure post-issuance tax compliance with respect to those Qualified 501(c)(3) Bonds issued on their behalf. As described in our June Client Bulletin (available at: http:// www.bricker.com/publications/articles/1110. pdf), the Service will send out more than 200 surveys to 501(c)(3) borrowers that reported outstanding tax-exempt bonds on IRS 2005 Form 990. The IRS has recently published the survey and cover letter (available at: http://www. irs.gov/taxexemptbond/article/0,,id=132042,00. html). These surveys request a broad range of information about a number of issues, including post-issuance compliance, private business use, arbitrage compliance, record retention and management practices. We expect that the responses to these surveys are likely to cause the Service to increase its enforcement activities, highlighting the importance for 501(c)(3) borrowers to develop effective post-issuance compliance policies and procedures to preserve the tax-exemption of the interest on their bonds.
The Service has proposed numerous changes to IRS Form 990, in particular the addition of a new Schedule K, which will require 501(c)(3) borrowers with outstanding bonds in excess of $100,000 to provide detailed information about their tax-exempt bonds, including identifying the investments and expenditures of bond proceeds, identifying any private business use of bond-financed facilities, and certifying the payment of required arbitrage to the Treasury. The Service intends to finalize this form effective for the 2008 tax year.
In Publication 4077 –Tax Exempt Bonds for 501(c)(3) Charitable Organizations (available at: http://www. irs.gov/pub/irs-pdf/p4077.pdf), the Service had previously published a general overview of the postissuance compliance rules under federal tax law that 501(c)(3) borrowers must follow. The IRS Advisory Committee on Tax Exempt and Governmental Entities has recently issued a paper entitled After the Bonds Are Issued: Then What? (available at: http://www.irs.gov/pub/irs-tege/bonds_act_0607.pdf), which is intended to assist 501(c)(3) borrowers and their responsible officers in developing policies, procedures and systems that will preserve the tax-exempt status of the bonds that benefit such organizations. This paper recommends that all 501(c)(3) borrowers with outstanding tax-exempt bonds establish appropriate procedures, including recordkeeping and record retention policies, and identify people responsible for implementing such procedures, to ensure that all postissuance tax compliance requirements are satisfied.
501(c)(3) borrowers with outstanding tax-exempt bonds should contact bond counsel to develop appropriate record retention policies and other post-issuance compliance practices, if they have not already done so. In certain circumstances, it may be possible to re-create records substantiating appropriate uses of bond proceeds and of bond-financed facilities. 501(c)(3) borrowers may be also able to correct significant record retention and other post-issuance compliance failures through the IRS Tax Exempt Bond Voluntary Closing Agreement Program.