The IRS recently announced that refund payments due to issuers of certain bonds will be reduced by 7.2% with respect to payments processed on or after October 1, 2013, and on or before September 30, 2014, as a result of automatic cuts in federal spending commonly referred to as "sequestration".  A similar reduction of refund payments due to sequestration was effective for the prior fiscal year at a rate of 8.7%.  The reduction in refund payments applies to Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds, and Qualified Energy Conservation Bonds for which the issuer elected to receive a direct credit subsidy pursuant to Section 6431 of the Internal Revenue Code.

The IRS has advised that issuers of affected bonds should continue to request refund payments by completing Form 8038-CP in accordance with the current Form 8038-CP instructions.  Affected issuers will be notified of the refund reduction through correspondence explaining that a portion of their requested refund was subject to the sequester reduction.  The IRS notice is available here.

A number of outstanding affected bonds affected by sequestration provide issuers with the option to redeem such bonds upon a reduction of the direct subsidy payments payable by the federal government.  Whether a redemption of affected bonds is in the best interest of an issuer will depend on multiple factors including the specific terms of the applicable redemption provisions, current market conditions and market conditions at the time of issuance of the affected bonds.  The language of the redemption provisions (including any premium or "make whole" provisions) must be examined carefully.