IRS Promotes Compliance by Direct Pay Bond Issuers
In furtherance of its commitment to promote federal tax compliance, the Tax Exempt Bonds office (TEB) of the Tax Exempt and Government Entities division initiated examinations on several issues of build America bonds (BABs) issued in 2009 and 2010. Information received during the examinations will help TEB both evaluate compliance of the bond issues and better understand compliance issues and practices in the relatively new market for BABs. TEB is aware that BABs and other direct pay bonds present novel interpretative issues and factual scenarios for issuers. As such, compliance programs with respect to direct pay bonds will reflect both TEB’s responsibility to promote compliance and its recognition of the importance of reasonable efforts to achieve compliance in light of such issues and scenarios.
TEB sent information document requests (IDRs) to the issuers of the BABs under examination. This sample of the IDR sent to issuers is representative of the actual IDR; however, the actual IDR received by an issuer may be different from this sample. The IDRs request information needed to measure compliance with federal tax requirements specific to BABs, including the limitation on premium under § 54AA(d)(2)(C), the irrevocable election requirements under § 54AA(d)(1)(C) and § 54AA(g)(2)(B), and the capital expenditure requirement and limitation on issuance costs financed by the issue under § 54AA(g)(2)(A). The IDRs also help TEB obtain information needed to determine if any of the BABs in the issue may be treated as retired or extinguished because of a merger of interests for federal tax law purposes. The questions presented in the IDRs are not indicative of any legal position taken by the IRS with respect to the requirements for BABs (including standards for determining when BABs acquired by entities related to the issuer may be deemed to be retired or extinguished for federal tax law purposes).
TEB is committed to further developing its compliance programs for direct pay bonds similar to its compliance programs for tax-exempt bonds. As such, TEB expects the number of TEB examinations of direct pay bond issues will be roughly proportional in its overall examination program for tax-exempt bonds. Additionally, TEB expects to update the Internal Revenue Manual section relating to TEB’s voluntary closing agreement program (TEB VCAP) with additional resolution standards for certain violations of requirements specific to BABs. Under consideration for the updated TEB VCAP program are resolution standards for violations of the limitation on premium, the capital expenditure requirement, as well as the limitation on issuance costs and private activity restrictions that would resolve violations on a basis proportional to the violation. TEB is also considering a resolution standard for direct pay bonds that were retired or extinguished because of a merger of interests. In the interim, issuers of BABs and other direct pay bonds can access TEB VCAP to resolve any identified compliance failure relating to their bonds.
TEB will continue to develop new outreach and informal educational materials for issuers of direct pay bonds in response to observed compliance trends. TEB welcomes comments and/or questions on direct pay bonds compliance matters. Comments or questions can be emailed to TEB Questions . Please insert "Comments and Questions: Direct Pay Compliance" into the subject line.