On August 22, 2007, the IRS posted a press release on its website announcing that its Tax-Exempt Bond (TEB) group and its Exempt Organizations Compliance Area (EOCA) have initiated a joint effort to collect detailed information from Section 501(c)(3) tax-exempt organizations. The information will be used to evaluate the organizations' policies and procedures regarding post-issuance compliance with the tax requirements that apply to their qualified 501(c)(3) bond debt obligations.
Large tax-exempt organizations, such as hospitals and educational institutions, are the primary users of the proceeds of tax-exempt bonds to fund the construction of facilities and the purchase of significant items of equipment to be used in activities furthering their charitable and educational purposes. Generally, at least 95% of the net proceeds of a qualified 501(c)(3) bond issue must be used in furtherance of those purposes, and may not be used for unrelated business purposes or by private business users. In addition, the investment of bond proceeds pending their use to construct or acquire the facilities for which they were issued may not produce impermissible arbitrage profits.
This new initiative will begin with the mailing of an explanatory cover letter and a "Tax-Exempt Bond Financings Compliance Check Questionnaire" (IRS Form 13907) to more than 200 exempt organizations that have indicated on their 2005 Forms 990 the existence of outstanding balances of tax-exempt bond liabilities. The five-page tax questionnaire, which consists primarily of "yes" or "no" questions, is broken down into five parts covering a broad range of subjects, including (1) the organization's internal debt management policies and procedures; (2) the organization's recordkeeping policies and procedures with respect to tax-exempt bonds; (3) the investment of unexpended proceeds and compliance with arbitrage yield restrictions and rebate requirements; (4) qualified use of the bond-financed facilities and the absence of private business use; and (5) general awareness of IRS voluntary compliance procedures and educational resources relating to tax-exempt bond financings.
On June 14, 2007, the IRS released for comment a draft redesigned Form 990, including Schedule K (Supplemental Information on Tax Exempt Bonds). There is no identified relationship between this compliance initiative and the redesigned Form 990 or the additional information that would be collected on Schedule K. TEB expects to analyze the data generated from the issuance of these compliance check questionnaires in order to become more familiar with the post-issuance compliance policies and practices of qualified 501(c)(3) bond borrowers, and expects to issue a report publicizing its findings and recommendations for follow-up outreach or compliance initiatives.
As noted in the cover letter, responding to the compliance check questionnaire is not mandatory as a legal matter. Failure to respond, however, is likely to produce a follow-up communication, and possibly result in an examination.