The Internal Revenue Service has initiated audits of certain Build America Bonds issued in 2009 and 2010. According to the IRS announcement issued on October 25, 2010, the number of BAB issues audited will be roughly proportional to the number of audits for tax-exempt bonds. The IRS further said that the purpose of the BAB audit program is to "both evaluate compliance of the bond issues and better understand compliance issues and practices in the relatively new market for BABs." The announcement further states the IRS is "aware that BABs and other direct pay bonds present novel interpretative issues and factual scenarios for issuers."

In connection with the audits underway, the IRS has sent information document requests ("IDR") to the BAB issuers. Click here for a sample of the IDR, although the IRS has indicated that the actual IDR received by an issuer may be different than this form. The sample IDR is focused on compliance with statutory requirements for the issuance of BABs, including the limitations on selling bonds at a premium, using no more than 2% of the proceeds for costs of issuance and using substantially all of the balance of the proceeds for capital expenditures. The sample IDR also is gathering information about whether BABs have been sold to an entity related to the issuer such as a pension fund.

The IRS is also updating the Internal Revenue Manual relating to the voluntary closing program ("VCAP") to include standards for certain violations related to BABs. Of interest is that the IRS says it will resolve "violations on a basis proportional to the violation." Apparently this means that BAB issuers will not lose the entire interest subsidy for minor violations.