During the past few months the Internal Revenue Service ("IRS") has published several items that collectively demonstrate a heightened focus on the actual implementation of post-issuance compliance plans by both governmental issuers and charitable (501(c)(3)) borrowers of tax-exempt bonds. Three IRS releases in 2011 highlight the importance to the IRS of the adoption of post-issuance tax compliance procedures by issuers and conduit borrowers engaged in tax-exempt or tax credit financing: the new Form 8038, the IRS's "Final Report on Governmental and Charitable Financings" and updates to the portion of the Internal Revenue Manual dealing with its Voluntary Compliance Agreement Program ("VCAP"). While the need for these procedures has become increasingly clear to 501(c)(3) organizations that have been confronted with completion of Form 990, Schedule K for their outstanding bond issues, the IRS has indicated that issuers of governmental bonds will become subject to the same scrutiny.
In April 2011 the IRS released a new Form 8038 for private activity bonds that contained two new "check the box" line items, asking the issuer to check a box if it had established written procedures to ensure that certain private business use problems are addressed and to check a box if it had established written procedures to monitor arbitrage requirements. A draft Form 8038-G has been circulated that includes the same line items for governmental bonds.
In its "Final Report on Governmental and Charitable Financings," released in July, 2011, the IRS detailed the results of two compliance questionnaire projects the IRS had conducted beginning in 2007, the first targeted at charitable organizations that had been the beneficiaries of tax-exempt financing and the second targeted at issuers of governmental bonds. The IRS reported that although a majority of respondents indicated they were aware of post-issuance compliance rules and had procedures, fewer than half of the charitable organizations and only about 20 percent of the governmental issuers were able to produce either specific procedures or an ad hoc process to assure compliance. The IRS reported that it will continue to stress the need for procedures through similar questionnaire checks.
On September 8, 2011, the IRS released updated procedures for its Voluntary Compliance Agreement Program through additions to the Internal Revenue Manual. Under VCAP, an issuer can request relief from a violation of a tax requirement pertaining to tax-exempt bonds, tax credit bonds or direct pay bonds. Among the required submissions that form the request for relief is an affirmative or negative statement as to whether the issuer has adopted comprehensive written procedures intended to promote post-issuance compliance with, and to prevent violations of, the provisions of the Code related to tax-advantaged bonds. I.R.M. 184.108.40.206.1.3. The issuer must also include a detailed description of the portion of such comprehensive procedures that relate to the violation that is the subject of the VCAP request. The description of such written procedures should identify the authorized person(s) who adopted the procedures, the officer(s) with responsibility for monitoring compliance, the frequency of compliance check activities, the nature of the compliance check activities undertaken, and the date such procedures were originally adopted and subsequently updated (if applicable). The extent to which an issuer has appropriate written compliance procedures will be an equitable factor that will receive consideration in determining appropriate resolution terms with respect to VCAP requests.
Under current practice the IRS has the tools to monitor ongoing bond compliance by charities, through the Form 990, Schedule K, and by issuers of direct pay bonds, through the Form 8038-CP required to be filed to claim subsidy payments, in which an issuer certifies that the bonds remain eligible for subsidy payments. There is at this time no comparable required periodic filing by issuers of governmental tax-exempt bonds other than the Form 8038-T required if a rebate payment is made. Nevertheless, issuers of governmental bonds should anticipate that there will be continued scrutiny of their procedures and that they too will need to address how they will check the box on the compliance questions on a future 8038-G.
Circular 230 Disclosure: To ensure compliance with Treasury Department regulations, we inform you that, unless specifically indicated otherwise, any tax advice contained in this memorandum, including any attachments, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.