The IRS is likely to use additional resources in fiscal 2012 for compliance programs aimed at taxpayers filing Form 990 Schedule K, "Supplemental Information on Tax-Exempt Bonds".
Those additional resources will target section 501(c)(3) bonds, and the information gleaned from reviewing the Schedule K returns will result in extremely targeted examinations to gather information on that specific matter. Promulgation of the Schedule K reviews has been a multiyear effort and the IRS has received many comments on the subject, mostly from accounting firms. The issues raised in those comments have been catalogued to determine what improvements need to be made.
Speaking on two separate panels at the National Association of Bond Lawyers' Bond Attorneys Workshop in San Antonio, Steven A. Chamberlin, Manager for compliance and program management in the Tax-Exempt Bonds Office, highlighted additional areas of enforcement, including increased correspondence audits. The correspondence exams are meant to increase market coverage while still appropriately balancing IRS resources.
The audits are aimed at obtaining information in an area where that can sometimes be lacking. Form 8038, "Information Return for Tax-Exempt Private Activity Bond Issues," is filed at issuance of the bond, and there is limited information that comes to the IRS after issuance.
While the taxpayer is typically the issuer of the bond and the voluntary closing agreement program (“VCAP”) is technically open to the taxpayer, the IRS usually deals closely with the borrower. The IRS is able to do so by having the bond issuer file Form 8821, "Tax Information Authorization," which gives the IRS the authority to speak directly with the borrower.
Changes to Internal Revenue Manual Section 7.2.3 describe the new requirements of the VCAP, and address ways to expedite the compliance process. They also refine the ability of taxpayers to submit anonymous requests, which in the past have led to some taxpayers seeking advisory opinions.
Lastly the most important change, addresses a provision related to the tangible economic benefit of the implementation of post-issuance compliance monitoring procedures. If an issuer adopts specific procedures, including designating responsible parties who have been properly trained, conducting reviews at least annually, and timely submitting a request to participate in the VCAP after discovering a violation, the IRS will calculate the settlement amount beginning on the date of discovery of the violation, rather than on the date of the violation itself. That can shorten the nonqualified period and reduce the overall settlement obligation.
We believe that the increased enforcement and review of tax-exempt bonds requires all non-profit bond issuers to shift resources and focus in 2012 so as to be prepared to address extensive compliance issues.