Soon, the Internal Revenue Service (IRS) will begin asking colleges and universities that have borrowed money through tax-exempt obligations about their compliance with the tax requirements governing these obligations.
Approximately 400 private and public colleges and universities will receive a Post-Issuance Tax Compliance Questionnaire from the IRS in the coming weeks. Your institution might be one of them, and now is the time to prepare.
The IRS recently announced that during 2008 it will send Compliance Questionnaires to approximately 400 colleges and universities with outstanding tax-exempt bonds to determine whether they are meeting post-issuance tax compliance requirements. The Compliance Questionnaires will be sent to both public and private nonprofit (Section 501(c)(3)) colleges and universities of various sizes, collectively referred to below as "universities."
The IRS also has announced that in addition to ascertaining whether universities have post-issuance compliance procedures in place, these Questionnaires will ask when the procedures were put into place.
Because your institution may receive a Questionnaire, it is important that your institution have adequate post-issuance tax compliance procedures in place as soon as possible.
These Compliance Questionnaires are not an IRS audit, but they may lead to an audit. They are a tool the IRS uses to determine whether a public university or a private "conduit borrower" university benefiting from tax-exempt bonds is adhering to recordkeeping, information reporting and other post-issuance tax compliance requirements. Universities' Questionnaire responses may prompt the IRS to initiate an audit.
In 2007, the IRS Advisory Committee on Tax Exempt and Government Entities issued a report on post-issuance tax exempt bond compliance. It was issued in response to the IRS' concern that many governmental bond issuers and private conduit borrowers (such as private universities) were not adequately monitoring their ongoing compliance with the various tax-exempt bond requirements. In order for bonds to be and remain tax exempt, the bond issuer and the private conduit borrower, if any, must ensure that various rules set forth in the Internal Revenue Code and Income Tax Regulations are met both at the time the bonds are issued and until they are paid in full. For example, after bonds are issued, a university must: properly spend the bond proceeds for qualifying capital expenditures; use the bond-financed property for permitted uses; comply with arbitrage yield restrictions; and make rebate payments to the US Treasury. The university must keep sufficient records to establish its compliance with the tax requirements beginning with the issuance date of the bonds and continuing until three years after its final payment.
The Compliance Questionnaires are part of the IRS' announced plans for increased scrutiny of bond issuers and conduit borrowers. While currently no penalties will flow directly from telling the IRS that your university does not have adequate post-issuance compliance procedures in place, or from telling the IRS that your post-issuance compliance procedures were put in place only after receiving a Questionnaire, these answers may increase your risk of being audited.
Because the post-issuance tax compliance requirements continue for many years, the IRS believes it is important for universities to adopt written post-issuance compliance procedures that can be easily understood and implemented by officials at the university responsible for monitoring compliance until the bonds are fully paid. University officials with these responsibilities will likely change over the life of a bond issue. The IRS recognizes that what constitutes appropriate post-issuance compliance procedures will vary depending upon the size and complexity of a specific university and of the bonds issued, as well as the number of bond issues that university must monitor.