The IRS Tax Exempt Government Entities Division has published a final report on its Tax-Exempt Charitable Financings Compliance Check Questionnaire and Governmental Bond Financings Compliance Check Questionnaire projects. The projects principally evaluated whether IRC section 501(c)(3) organizations and governmental bond issuers generally have a sufficient level of knowledge of the post-issuance tax compliance requirements applicable to their tax-exempt obligations. In addition, the questionnaires asked governmental issuers and 501(c)(3) organizations about their compliance training programs for individuals responsible for monitoring post-issuance compliance of tax-exempt bond financings. See www.irs.gov/taxexemptbond/index.html.
Focus of the Report
The initiative focused on measuring several aspects of post-issuance compliance practices of 501(c)(3) colleges, universities, hospitals and senior housing projects regarding:
- Written procedures or guidelines,
- Recordkeeping and retention policies,
- Arbitrage yield restriction and rebate requirements,
- Bond expenditures and asset management procedures; and
- Private business use monitoring procedures.
Monitoring compliance with the rules for tax-exempt bonds after the bonds have been issued is a shared responsibility between a governmental issuer and the entity borrowing the bond proceeds. State and local governments issue the bonds on behalf of section 501(c)(3) organizations, which in turn use the proceeds to facilitate their large capital project needs. If records are missing or incomplete, the IRS will attempt to promote post-issuance compliance. However missing or incomplete records, could lead the IRS to conduct an examination and find that the bonds may be in substantial noncompliance. In that case the IRS has several options from issuing a warning to a proposed revocation of the tax-exempt status of the bonds, enter into a settlement agreement with parties or apply section 150(b)(3) to hold any portion of a facility financed from the proceeds of any private activity bond subject to unrelated trade or business as defined under section 513.
While 95% of the 501(c)(3) organizations responding to the questionnaire indicated that they had implemented procedures to ensure effective monitoring of post-issuance compliance, 16% of 49% had implemented written specific procedures and 33% did so on an ad hoc basis. Moreover, while 97% of the respondents said that they had maintained necessary books and records to substantiate compliance, a number of the respondents indicated that they had not necessarily retained certain types of records on a consistent basis including their Form 1023 application for tax-exemption. Failure to maintain this record could result in noncompliance of their 501(c)(3) status and the requirements of section 145.
The report found that the responses to the questionnaire indicted a high recognition of the importance of post-issuance compliance and recordkeeping but that “the overall effectiveness of such program was questionable.” The report suggested the following actions:
- That 501(c)(3) and governmental organizations have clearly defined procedures to implement post-issuance compliance to insure that person responsible for post-issuance compliance fulfills their duties.
- Retention of sufficient records to allow responsible officials to successfully perform compliance monitoring.
- Monitoring of post-issuance compliance and record keeping should be integrated with existing accounting supplies.
Future IRS Actions
The report indicted that the Tax Exempt Bond Unit of the IRS may issue further questionnaires targeting post-issuance compliance and record retention practices of issuers of other types of bonds.
Section 501(c)(3) organizations that file a schedule K, Supplemental Information on Tax-Exempt Bonds, to their Form 990 should consider undertaking a compliance review of their regularly and records retention practices to make sure that they are meeting all the IRS tax-exempt bond requirements.