The IRS announced that it is sending compliance check questionnaires to 269 governmental entities that issued advance refunding bonds between July 1, 2009, and June 30, 2010. The IRS is also sending questionnaires to 31 exempt organizations who were the beneficiaries of advance refunding 501(c)(3) bonds issued during the same time period. More information, as well as a copy of the questionnaire, can be found on the IRS website at http://www.irs.gov/taxexemptbond/article/0,,id=239689,00.html.

The compliance check contains the following areas of inquiry:

  • current debt management policies and procedures for determining when to advance refund a bond, including the approval process required and whether capital appreciation or zero coupon bonds are utilized in the financing structure
  • current procedures to assure compliance with qualification requirements applicable to advance refunding bonds
  • current arbitrage yield restriction and rebate procedures, including procedures utilized for the purchase of investments and procedures for sending out redemption notices
  • current procedures related to determining the issue price of the bonds
  • current record retention procedures with respect to both refunding bonds and refunded bonds
  • whether there are written procedures to ensure the timely identification and correction of violations of federal tax requirements with respect to both refunding bonds and refunded bonds
  • whether the recipient is aware of the availability of voluntary compliance options for the correction of failures to comply with federal tax requirements after the bonds are issued (namely, remedial actions provided in the Treasury Regulations and the Tax Exempt Bonds Voluntary Closing Agreement Program)

The compliance check questionnaires are not audits of a bond issue, but can potentially lead to an examination if recipients do not respond. Accordingly, issuers or exempt organizations who receive these questionnaires should endeavor to respond in a timely fashion.