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Part 21. Customer Account Services

Chapter 7. Business Tax Returns and Non-Master File Accounts

Section 7. Exempt Organizations and Tax Exempt Bonds (Cont. 3)

21.7.7  Exempt Organizations and Tax Exempt Bonds (Cont. 3)

21.7.7.4 
Exempt Organization Procedures

21.7.7.4.23 
Exempt Organization Penalties

21.7.7.4.23.1 
Daily Delinquency Penalty

21.7.7.4.23.1.1  (01-01-2012)
Correspondence Codes

  1. Correspondence Codes (CC) are used on all EOMF forms to indicate information was missing from the return and the results of correspondence sent to the taxpayer to secure the missing information.

  2. Missing information is divided into two categories:

    • Correspondence Items (Non-IRI) - Correspondence items are requested only once.

    • Incomplete Return Items (IRI) - Information needed for the IRI Program are requested twice.

  3. Refer to the table below for Correspondence Codes and definitions.

    Correspondence Code (CC) Definition
    CC 11 Reply to IRI or non-IRI correspondence with all information
    CC 12 Reply to non-IRI correspondence with some information
    CC 13 Reply to non-IRI correspondence with no information
    CC 14 No reply to non-IRI correspondence
    CC 15 Reply to the first IRI correspondence with all information. (Zero filer)
    Note : A second correspondence is not sent.
    CC 16 No Reply to the first IRI correspondence – Org. code 9 filer.
    Note A second correspondence is not sent.
    CC 21 Reply to second IRI correspondence with all information: DDP assessed
    CC 22 Reply to second IRI correspondence with some information: DDP assessed
    CC 23 Reply to second IRI correspondence with no information: DDP assessed
    CC 24 No reply to second IRI correspondence: DDP assessed

  4. The CC is located on TXMODA. See Figure 21.7.7-3 below.

    Figure 21.7.7-3
    This image is too large to be displayed in the current screen. Please click the link to view the image.

    TXMODA Print

21.7.7.4.23.1.2  (01-01-2012)
Non-IRI Items

  1. When missing information is received on Non-IRI, the applicable CC (11-14) is input and the Correspondence Received Date (CRD) is entered. If the return was filed late, the DDP is computed from the Return Due Date (RDD) to the Return Received Date (RRD).

  2. Non-IRI items are corresponded for only once. If the missing information is not received within the allotted time frame, the return is processed as is. A DDP will only be assessed on Non-IRI accounts if the return was filed late.

  3. When it is determined that the missing information is a Non-IRI based on the Correspondence Codes (11-14), the DDP may be removed without securing the missing information if reasonable cause criteria for filing late have been provided.

  4. Associate all missing information received from an organization to the original return, regardless of the Correspondence Code.

  5. The following correspondence codes are applicable to Non-IRI Items. These items are corresponded only once.

    • Code 11 - Reply to IRI or Non-IRI correspondence with all information

    • Code 12 - Reply to Non-IRI correspondence with some information

    • Code 13 - Reply to Non-IRI correspondence with no information

    • Code 14 - No reply to Non-IRI correspondence

21.7.7.4.23.1.3  (01-01-2012)
Incomplete Return Item Program (IRI)

  1. The IRS implemented an "Incomplete Return Item" (IRI) program for Form 990, Form 990-EZ, and Form 990-PF . The program is applicable for tax periods 198312 and subsequent.

  2. A Daily Delinquency Penalty (per IRC 6652(c)(1)) will be imposed for returns filed with required information omitted. The basis of this program is to secure a complete return rather than assess penalties against the organization.

  3. If missing information is received or the return is purged from suspension for the IRI program, a Correspondence Code 11 or 21-24 is entered. If the taxpayer replies to either the first or second correspondence with the missing information or provides reasonable cause as to why the information cannot be furnished, the applicable correspondence code is entered, along with the correspondence received date.

  4. If the taxpayer does not respond to our second request for the missing information, a CCC "3" (no reply indicator) is entered which indicates there was no reply to our correspondence. A Correspondence Code "24" is also entered and no correspondence received date is entered.

  5. When the organization replies to either the first or second inquiries for the missing IRI, the correspondence received date will be entered to reflect the date Error Resolution received the missing information.

  6. The following correspondence codes are applicable to IRI Items:

    • CC 15 — Reply with all information to first correspondence (zero filers).

    • CC 16 — No Reply to first correspondence (zero filers).

    • CC 21 — Reply to second letter with all information.

    • CC 22 — Reply to second letter with some information.

    • CC 23 — Reply to second letter with no information.

    • CC 24 — No reply to second letter.

  7. If missing/incomplete information is received in EO Accounts and no TC 150 is posted to MF, research IDRS to determine if the original return is in ERS or Unpostables. If nothing is found, suspend the missing information pending the posting of a TC 150. Allow six weeks suspension time from the return due date or extended due date. If no TC 150 posts to MF by the end of the suspension period, take the following action;

    If Then
    a copy of the return is included with the missing information, 1) Attach the missing information to the return.
    2) Send return to Batching to be process as the original.
    a copy of the return is not included, 1) Prepare the applicable CRX letter and return the missing/incomplete information to the organization.
    2) Instruct the organization to attach the missing/incomplete information to a copy of the original return and resubmit the entire package to IRS.

21.7.7.4.23.1.3.1  (01-01-2012)
Incomplete Return Item (IRI) Codes

  1. Incomplete Return Item (IRI) codes allow the tax examiner to identify the IRI item that was missing from the organization's original return. Each IRI code identifies the specific item that was missing or incomplete on the original return. The codes are entered during the initial processing of the return and can be located on TXMODA, BMFOL or BRTVU.

  2. Due to the redesign of the Form 990 and Form 990-EZ for TY 2008, additional IRI codes were established.

  3. If the organization fails to respond to previous letter(s) from the IRS requesting the missing or incomplete information, the IRI code(s) are entered by Rejects. The return continues through processing and if a penalty is applicable, a CP 141I (incomplete), CP 141L (late filed) or CP 141C (late filed and incomplete) notice is generated to the organization.

  4. The table below identifies the applicable form, IRI codes, related missing/incomplete items, and the notice paragraph that is generated when the CP 141"I," "L" or "C" is issued.

    IRI Codes for TY 2007 & Prior
    IRI Code Applicable
    Form    		 Missing or Incomplete Item CP 141 Paragraphs
    92 990 Part II Form 990, Part II was blank or incomplete. All organizations must complete Part II column (A). If you are an organization exempt under Section 4947(a)(1), 501(c)(3), or 501(c)(4), then you must also complete columns (B), (C), and (D).
    94 Part IV Form 990 Part IV, Balance Sheets was blank or column (A) or (B) was not complete. You must complete lines 59, 66 and 73. If any line is zero, enter zero. According to the form instructions you may not submit a substitute balance sheet. Please complete both columns in Part IV, Balance Sheets.
    95 Part V Form 990, Part V was incomplete, blank, or the list attached did not include compensation paid. Please list each of the organization’s officers, directors, trustees, and key employees even if they didn’t receive any compensation from the organization. Enter zero in columns (C), (D), and (E) if no compensation was paid.
    96 Part XI Form 990, Part XI was blank or incomplete. Controlling Organizations defined in section 512(b)(13), must check the applicable box on lines 106, 107 and 108. If you checked the "Yes" box on lines 106 or 107, then you must also complete columns (a) through (d).
    61 990-EZ
    (Doc Code 09)     		Part I You must file Form 990 rather than Form 990-EZ because either your total assets shown on line 25 of your Form 990-EZ was more than $250,000 or your gross receipts are more than $100,000. To compute gross receipts, add the amounts on Forms 990-EZ lines 5b, 6b, and 7b back into the amount on line 9.
    62 Part II Form 990-EZ, Part II, Balance Sheets, is blank or column (A) or (B) is not complete. You must make an entry on lines 25, 26, and 27. If any line is zero, enter. You may not submit a substitute balance sheet. Please complete both columns in Part II.
    64 Part IV Form 990-EZ, Part IV, List of Officers, Directors, Trustees, and Key Employees, is incomplete or an attached list did not include compensation paid. Please list each of the organization’s officers, directors, trustees, and key employees even if they didn’t receive any compensation from the organization. Enter zero in columns (C), (D), and (E) if no compensation was paid.
    30 990 or
    990-EZ     		Schedule A
    (entirety)     		Organizations exempt under section 501 (c) (3) or section 4947 (a) (1) must file Schedule A. Please see General Instructions A and D and complete pages 1-6 on Schedule A. Remember, PART IV, QUESTIONS 5-14 CANNOT BE BLANK or not applicable (N/A).
    31 990 Schedule A,
    Part I     		A name was present in Part I of Schedule A, but no amount was entered and Form 990, Part II, line 26, Column (A) was more than $50,000.
    41 990-EZ Schedule A,
    Part I     		A name was present in Part I of Schedule A, but no amount was entered and Form 990-EZ, Line 12, was more than $50,000.
    32 990 Schedule A,
    Part II     		A name was present in Part II of Schedule A, but no amount was entered and Form 990, Part II, Column (A), Lines 30-32 combined was more than $50,000.
    42 990-EZ Schedule A,
    Part II     		A name was present in Part II of Schedule A, but no amount was entered and Form 990-EZ, Line 13, was more than $50,000.
    33 990 or
    990-EZ     		Schedule A,
    Part III     		Schedule A, Part III, Question 1 was answered "yes" , and the dollar line was blank and Parts VI-A and VI-B are blank and a statement was not attached.
    34 990 or
    990-EZ     		Schedule A,
    Part IV     		Schedule A, Part IV required one box to be checked. Schedule A Part IV, questions 5-14 cannot be blank, not applicable, or have more than one box checked. If you checked the box on line 6, you must complete Part V. If you checked box 10, 11, or 12, you must complete Part IV-A, lines 15-24. If you checked the box on line 13, you must also check the applicable box that describes the type of supporting organization and complete columns (a) through (e).
    38 990 or
    990-EZ     		Schedule A,
    Part IV-A     		The information on your return or in our records requires you to complete Schedule A, Part IV-A, Support Schedule, Page 3.
    35 990 or
    990-EZ     		Schedule A,
    Part V     		Schedule A, Part V was incomplete or blank. All schools must complete Part V. You may not leave any question blank. Please complete all questions in Part V of Schedule A. If your organization is not a school, please check the applicable box in Part IV, Schedule A and answer Part IV, Questions 5-14.
    36 990 or
    990-EZ     		Schedule A,
    Part VI-A     		Please complete Schedule A, Part VI-A, Lobbying Expenditures by Electing Public Charities, column (b), if you filed a lobbying election on Form 5768, Election/Revocation of Elections by an Eligible Section 501 (c) (3) Organization to Make Expenditures To Influence Legislation. If you didn’t file Form 5768, please complete Schedule A, Part VI-B, Lobbying Activity by Non-electing Public Charities and send us a detailed description of your legislative activities and the money you spent (or owe) on that activity. If the electing organization belongs to an affiliated group, the electing organization must also attach a schedule showing each member’s name, address, Employer Identification Number and lobbying expenses.
    37 990 or
    990-EZ     		Schedule A,
    Part VII     		You answered "yes" to question 51a, b, or c, on Schedule A, Part VII. However, you did not complete question 51d, Part VII. OR you answered "yes" to question 52a, on Schedule A, Part VII. However, you did not complete question 52b, Part VII. Please complete question 51d or 52b of Schedule A.
    01 990-PF
    (Doc Code 91)     		Part I Part I, column (a) was not completed.
    02 Part II The Balance Sheet in Part II was incomplete or blank and Part VII-A, Line 7 was marked "yes" .
    05 Part VII-A Part VII-A, Lines 11a, 11b and 12 are blank. If the foundation owned a controlled entity within the meaning of section 512(b)(13), the questions on line 11a, 11b and 12 must be completed.
    06 Part VII-A You answered "yes" to question 11a in Part VII-A. However, you did not attach the required schedule. Please complete the schedule as outlined in the Form 990-PF instructions.
    07 Part VII-A You must complete Lines 11b and 12, Part VII-A, if you answered "yes" to line 11a.
    08 Part VIII Part VIII, Line 1 must list the names, addresses, and other information requested for the officers, directors, and trustees of the foundation. Line 2 must include compensation of the five highest paid employees earning over $50,000 and line 3 must include the amount for the five highest paid independent contractors earning over $50,000. Please complete Part VIII.
    10 Part X Part X was not completed. All domestic and certain foreign foundations must complete Part X, lines 1 through 6.
    11 Part XI Part XI was not completed. If any line is zero, enter "0" .
    13 Part XIII Part XIII was not completed.
    14 Part XIV Part XIV is incomplete or blank. All organizations that claim status as a private operating foundation under IRC Section 4942(j)(3) or 4942(j)(5) must complete Form 990-PF, Part XIV. Please complete all of Part XIV. Blank, zero, or "N/A" is only acceptable for the years the organization does not claim status as a private operating foundation. If you are no longer a private operating foundation, please call the Customer Account Services at 1-877-829-5500 (toll-free). They can assist you in determining what actions you should take.
    15 Part XV Line 2a through d in Part XV was not completed. If the foundation only makes contributions to pre-selected charitable organizations and does not accept unsolicited applications for funds, check the box on line 2, Part XV. In the future, if the foundation only makes contributions to pre-selected charitable organizations please check the box on line 2, Part XV. OR You did not state the purpose of the grant or contribution in Part XV line 3. This must be completed if Part I, line 25 has an amount. Please state the purpose. If the foundation only makes contributions to pre-selected charitable organizations and does not accept unsolicited applications for funds, check the box on Line 2, Part XV.
    17 Part XVII You must complete line 1d, Part XVII, if you answered "yes" to line 1a, 1b, or 1c. You must complete line 2b, Part XVII, if you answered "yes" to line 2a. "N/A" (not applicable) is not an acceptable answer. Please complete the applicable lines in Part XVII.
    50 990,
    990-EZ, or
    990-PF     		Schedule B Schedule B, Schedule of Contributors, is a required attachment for Form 990, 990-EZ or 990-PF. All organizations must complete and attach Schedule B or certify they are not required to file Schedule B. Guidelines for filing Schedule B can be found in Forms 990, 990-EZ or 990-PF instructions. Please complete a Schedule B. If your organization is not required to attach Schedule B, please let us know.
    IRI Codes for TY 2008 & Subsequent
    IRI Code Applicable Form Item Missing or Incomplete CP 141 Paragraph
    91 990 or
    990-EZ     		Filed incorrect form You must file Form 990 rather than Form 990-EZ because either your total assets or gross receipts were greater than the amount allowed for you to file using Form 990-EZ. For more information, see the instructions to Form 990 and 990-EZ.
    87 990 Part VII Form 990, Part VII is incomplete, blank, or the list attached did not include compensation paid. Please list each of the organization’s officers, directors, trustees, and key employees even if the didn’t receive any compensation from the organization. Enter zero in columns (D), (E), and (F) if no compensation was paid.
    88 990 Part VIII Form 990, Part VIII is incomplete or blank. All organizations are required to fill out this section of Form 990.
    89 990 Part IX Form 990, Part IX is incomplete or blank. All organizations must complete Part IX column (A). If you are an organization exempt under Section 501(c)(3), or 501(c)(4), then you must also complete columns (B), (C), and (D).
    80 990 Part X Form 990 Part X, Balance Sheets is blank or column (A) or (B) was not complete. You must complete lines 16, 26 and 33. If any line is zero, enter zero. According to the form instructions you may not submit a substitute balance sheet. Please complete both columns in Part X, Balance Sheets.
    51 990 or
    990-EZ     		Schedule C Schedule C, Political Campaign and Lobbying Activities, is missing or blank. You answered yes to questions 3, 4, or 5 on Form 990, Part IV, or yes to questions 46 or 47 on Form 990-EZ, Part VI. By answering yes to one of these questions, you are required to complete the applicable part(s) of Schedule C.
    52 990 Schedule D,
    Part I     		Schedule D, Part I, Supplemental Financial Statements, is missing, incomplete or blank. You answered yes to question 6 on Form 990, Part IV, which requires you to complete Part I of Schedule D.
    53 990 or
    990-EZ     		Schedule E Schedule E, Schools, is missing or blank. You answered yes to question 13 on Form 990, Part IV, or yes to question 48 on Form 990-EZ, Part VI. By answering yes to one of these questions, you are required to complete the applicable part(s) of Schedule E. If your organization is not a school, please check the applicable box in Part I, Schedule A and answer questions 1-11.
    57 990 Schedule H Schedule H, Hospitals is missing or blank. You answered yes to question 20a on Form 990, Part IV. By answering yes to this question, you are required to complete the applicable part(s) of Schedule H.
    56 990 Schedule J Schedule J, Compensation Information, is missing, or blank. You answered yes to question 23 on Form 990, Part IV, which requires you to complete the applicable part(s) of Schedule J.
    54 990 or
    990-EZ     		Schedule L Schedule L, Transactions with Interested Persons, is missing or blank. You answered yes to questions 25a, 25b, 26, 27, 28a, 28b or 28c on Form 990, Part VI, or yes to questions 38b or 40b on Form 990-EZ, Part V. By answering yes to one of these questions, you are required to complete the applicable part(s) of Schedule L.
    58 990 or 990-EZ Schedule O Schedule O, Supplemental Information to Form 990, is missing or blank. You entered an amount on line 8 Part I of the Form 990-EZ or you filed a Form 990. All Form 990 filers must complete Schedule O.
    55 990 Schedule R Schedule R, Related Organizations, is missing or blank. You answered yes to questions 33, 34, 35, 36, or 37, on Form 990, Part IV, which requires you to complete the applicable part(s) of Schedule R.
    20 990 or
    990-EZ     		Schedule A (entirety) Schedule A, Public Charity Status and Public Support, is missing or blank. Organizations exempt under section 501(c)(3) or section 4947(a)(1) must file Schedule A. Please see General Instructions A and Appendix H and complete pages 1-3 on Schedule A. Remember, Part I, Questions 1-11 cannot be blank or not applicable (N/A).
    21 990 or
    990-EZ     		Schedule A,
    Part I, line 11h     		Schedule A, Charity Status and Public Support, Part I requires one box to be checked. Schedule A Part I, questions 1-11 cannot be blank, not applicable (N/A), or have more than one box checked. If you checked box 2, attached a Schedule E. If you checked box 3, attached a Schedule H. If you checked box 5, 7, or 8, complete Schedule A, Part II. If you checked box 9, complete Schedule A, Part III.
    22 990 or
    990-EZ     		Schedule A,
    Part II     		Schedule A, Public Charity Status and Public Support, Part II is incomplete or blank. You checked the box on Line 5, 7, or 8, Part I, Schedule A, which requires you to complete Part II of Schedule A.
    23 990 or
    990-EZ     		Schedule A,
    Part III     		Schedule A, Public Charity Status and Public Support, Part III is incomplete or blank. You checked the box on Line 9, Part I of Schedule A, which requires you to complete Part III of Schedule A.
    50 990,
    990-EZ, or
    990-PF     		Schedule B Schedule B, Schedule of Contributors, is missing or blank. Schedule B is a required attachment for Form 990, 990-EZ and 990-PF. All organizations must complete and attach a Schedule B or certify they are not required to file a Schedule B. If your organization is not required to attach a Schedule B, please let us know. Guidelines for filing Schedule B can be found in Forms 990, 990-EZ or 990-PF instructions.
    90 990,
    990-EZ, or
    990-PF     		Missing Signature You didn't sign your return. You need to sign the declaration at the bottom of this notice. The signed declaration will become a permanent part of your return.
    98 990
    (Doc Code 90 only)     		Incorrect form filed You filed a 2007 (or prior year) revision for Form 990 for a tax period of 2008 or later. Beginning with the 2008 Form 990 revision, additional information is required to be reported by exempt organizations. You must file a 2008 (or subsequent revision) Form 990 for tax periods 2008 or later to satisfy your organization’s reporting requirements. Failure to file the correct form revision will result in a Daily Delinquency Penalty under section 6652(c)(1)(A).

21.7.7.4.23.1.4  (01-01-2012)
Correspondence Received Date

  1. The Correspondence Received Date (CRD) must be entered or updated when missing information is received after the return has posted. This can be done by inputting CC REQ54 and entering the CRD in the RET-PROC-DT field to reflect the date the missing information was received. Penalties must also be adjusted (if necessary) at the same time. Refer to Figure 21.7.7-4 below.

  2. The CRD must only be entered or updated when all the missing information has been received.

  3. The missing information should always be associated with the original return by entering the applicable adjustment in the 00 (zero) or 18 block.

    Note:

    If CC 21 is present with a CRD later than the date shown on the missing information received in EO Accounts, do not update the existing CRD field.

    Figure 21.7.7-4
    This image is too large to be displayed in the current screen. Please click the link to view the image.

    TXMODA

21.7.7.4.23.1.5  (01-01-2012)
DDP Computation

  1. The Daily Delinquency Penalty is computed based on various factors such as the Return Due Date (RDD), Return Received Date (RRD), Correspondence Received Date (CRD) and the Correspondence Indicator Code (CC).

  2. The table below outlines how the number of days are determine in order to calculate the DDP.

    If CC is And Then
    Blank the CRD is the same as the RRD figure the number of days from the RDD to the RRD.
    11, 12, 13
    or 14    		 the RRD is later than the RDD figure the number of days from the RDD to the RRD.
    21, 22, or 23 the CRD is later than the RDD figure the number of days from the RDD to the CRD.
    24 the CRD is blank figure the number of days from the RDD to the 23c Date.

21.7.7.4.23.1.6  (01-01-2012)
Abatement Procedures

  1. The DDP on Form 990, Form 990-EZ, Form 990-PF, Form 1041-A and Form 5227 may be abated only when the following conditions are met:

    • A reasonable cause explanation for late filing is provided.

    • The missing/incomplete information is submitted, along with a reasonable cause explanation as to why the information was not provided with the initial return.

    • A reasonable cause explanation as to why the missing information cannot be provided (e.g., records lost in fire, taken by previous treasurer, etc.).

  2. The penalty may be decreased if the return was filed late and incomplete and the removal of the "incomplete" condition allows for a lowered late filing DDP. The penalty should be adjusted to reflect only the late filing portion.

  3. Refer to the table below when determining whether a DDP penalty can be removed.

    If the return is timely filed or considered timely filed based on RC And Correspondence Code is Then
    With CCC "R" 11 or 21 Abate DDP
    With CCC "R" Blank Abate DDP
    With CCC "R" 12, 13, 14, 15 or 16 Abate DDP -
    Non-IRI items do not have to be secured prior to abatement consideration
    With CCC "R" 22, 23, or 24 Abate DDP after the missing information and a reasonable cause statement is provided

  4. Associate all missing information provided by the taxpayer to the original return, even if the taxpayer states the information has previously been provided. Information can be associated to the original return by entering a TC 290 in the applicable blocking series (00 or 18), along with updating the CRD.

    Reminder:

    The CRD must only be entered or updated when all the missing information has been received.

21.7.7.4.23.1.7  (01-01-2012)
Form 3870 Penalty Abatement Requests

  1. Form 3870, Request for Adjustment, is generally submitted by Revenue Officers (RO) when requesting TEGE penalty abatements. Form 3870 penalty abatement requests are worked in EO Accounts and are normally received either by mail or via fax.

  2. A signed reasonable cause statement provided by the organization must be included with the Form 3870, along with any missing or incomplete information (if applicable). If the missing or incomplete information cannot be provided, a detailed explanation stating why the information cannot be provided must be included as well. The Form 3870 itself is not sufficient documentation for abating a penalty.

  3. If a reasonable cause statement and/or the missing or incomplete information is not included, contact the RO by telephone to request a copy from the case file (if available). The RO's name and telephone number can be located on Form 3870, line 13. If immediate contact with the RO is not possible, leave a message and allow three (3) business days for a reply.

  4. If the RO does not reply, request the reasonable cause statement and/or the missing/incomplete information from the organization. Refer to the procedures outlined below when attempting to secure the required documentation.

    1. Send applicable CRX letter (1382C).

    2. Input a Staup for 6 cycles.

    3. Close control base.

    4. Annotate action taken on CIS/DI.

    Note:

    Only Form 3870 penalty abatement requests will be accepted in EO Accounts. All other Form 3870 adjustment requests (i.e., credit transfers, tax decreases/increases, etc.) will be returned to the originator.

21.7.7.4.23.1.8  (01-01-2012)
DDP on Delinquent Secured Returns
and Substitute for Return (SFR)

  1. Specific research and analysis must be completed before penalties can be removed on accounts where a TC 599 CC96 is present on the module. TC 599 CC96 indicates that the return is a delinquent return (secured by a TE/GE revenue agent or EO Entity unit) or a Substitute for Return (SFR) prepared by a revenue agent.

  2. Since both TE/GE revenue agents and the EO Entity unit input a TC 599 CC96 on delinquent returns, additional research must be conducted by EO Accounts. Delinquent returns or SFRs prepared by an EO agent will have specific instructions and annotations regarding the assessment and/or non-assertion/abatement of penalties.

  3. Delinquent returns processed by EO Entity can be identified by unique "Indicator Codes" that are located in the Master File History Section on CC TXMODA (see Figure 21.7.7-6 below).

  4. An Indicator Code is generated when the account is in MF status 02 or 03 and a TDI has been issued. The valid Indicator Code range is:

    • A, B, C, X and Z or

    • 1 through 9

  5. Refer to the table below to determine who input the TC 599 CC96 and when to order the original return from Files.

    If Then
    Indicator Codes A, B, C, X , Z or
    1 through 9 is present,     		1. The return was received and processed by EO Entity.
    2. TC 599 CC96 was input by EO Entity.
    3. Refer to R/C criteria in determining penalty abatement. Do not request the original return.
    Indicator Code is not present, 1. The return was secured and submitted by a revenue agent.
    2. TC 599 CC96 was input by the agent.

    3. If the return is identified as a delinquent return or a return secured by a TE/GE agent, check to see if computer condition code (CCC) "7" is edited on the return. CCC 7 indicates reasonable cause was denied by the agent and is located just below the entity portion of the return..
    4. If CCC 7 is not edited on the return, refer to R/C criteria in determining penalty abatement.
    5. If CCC 7 is edited on the return, reasonable cause should be officially denied and penalty appeal rights provided.

21.7.7.4.23.2  (01-01-2012)
Estimated Tax Penalty

  1. Most exempt organizations are required to make estimated tax payments on their unrelated business income tax as if they were corporations.

  2. Form 990-T and Form 990-PF are subject to estimated tax penalties. Political organizations are not required to make ES payments; therefore, Form 1120-POL filed by a political organization is not subject to ES payments. However, filers of Form 1120-POL that are not political organizations are required to make ES payments. The rules for computing, assessing and abating these penalties are basically the same as those for Form 1120-POL.

  3. Tax exempt corporations use Form 990-W or Form 1120-W to compute their estimated tax. Estimated tax must be paid by EFTPS, if required.

  4. Estimated tax payments must be made if the total expected tax (income tax minus credits) for the tax year is $500 or more.

  5. Payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year and should be made using EFTPS, if mandated, . Additionally, twenty-five percent of the amount of any required installment of corporate estimated tax which is otherwise due in September 2003 will not be due until October 1, 2003.

  6. For taxable years beginning after August 5, 1997, the due date of a private foundation's first installment was changed from the 15th day of the 4th month to the 15th day of the 5th month. If the organization is required to file a Form 990-T in conjunction with the Form 990-PF, the first installment for the Form 990-T will also be due on the 15th day of the 5th month.

  7. Estimated tax penalties for EOMF are computed using Form 2220. CCC "A" means that a Form 2220 is attached to the return but it indicates there is no liability for an ES penalty. CCC"8" means a Form 2220 or a letter is attached with a worksheet showing the penalty was computed using the annualized exception.

  8. Refer to IRM 21.7.4.4.5; IRM 21.7.11.4.8; and IRM 20.1.3 for additional information regarding Estimated Tax Penalties.

21.7.7.4.23.2.1  (01-01-2012)
Large Organizations

  1. A "large organization" is any tax-exempt corporation or other organization subject to the tax on unrelated business income and any private foundation that had, or its predecessor had, taxable income of $1 million or more for any of the preceding 3 tax years. For this purpose, taxable income is modified to exclude net operating loss or capital loss carrybacks or carryovers. Members of a controlled group, as defined in IRC 1563, must divide the $1 million amount among themselves in accordance with rules similar to those in IRC 1561.

  2. If an organization is required to file a Form 990-T and Form 990-PF, each return should be considered individually before applying the Large Corporation criteria for computing the estimated tax penalty.

21.7.7.4.23.2.2  (01-01-2012)
EO CP 234

  1. Follow procedures outlined in IRM 21.7.11.4.8 for resolution of CP 234 cases.

21.7.7.4.23.2.3  (01-01-2012)
Proxy Tax

  1. Proxy tax, which is entered by the taxpayer on line 37 of Form 990-T, is not subject to ES penalty.

  2. Use CC BRTVU to ascertain if proxy tax was entered by the taxpayer. On returns processed in 1995 and subsequent, it can be found on line 37 of BRTVU.

  3. If proxy tax is involved, it should be deleted when computing the ES penalty.

21.7.7.4.23.2.4  (01-01-2012)
Annualizing

  1. Exempt Organizations are limited to the type of options available to them when annualizing their Estimated Tax Penalty. Only the Standard option and Option 1 can be used. Option 2 is not available to tax-exempt organizations and private foundations.

  2. When computing an annualized penalty, verify the organization is using the correct periods on line 1 and the correct annualized amounts on line 3 of Schedule A, Part I. You will not be able to verify line 2. Math verify pages 3 and 4 to determine the correct installment amounts to be carried to page 1. Math verify page 1 and compute the penalty on page 2 on any underpayment.

    Note:

    An organization may elect to choose separate options for each installment period per IRC 6655(g)(3). Therefore, for purposes of Line 1 of Schedule A, an organization may switch from one option to another for each installment.

  3. The table below provides the available options and installment months used when computing an annualized Estimated Tax Penalty.


    Line 1    		 1st
    Installment    		 2nd
    Installment    		 3rd
    Installment    		 4th
    Installment

    Line 3    		 1st
    Installment    		 2nd
    Installment    		 3rd
    Installment    		 4th
    Installment
    Standard
    Option    		 2 3 6 9
    Option 1 2 4 7 10
     
    Standard
    Option    		 6 4 2 1.33333
    Option 1 6 3 1.71429 12

21.7.7.4.23.2.4.1  (01-01-2012)
Income From Pass-through Entities

  1. Taxpayers with income from pass-through entities are not exempt from ES payment requirements. It is the taxpayer's responsibility to become informed about its distributive share of income from the pass-through entity for each of its individual annualization periods. If the taxpayer chooses not to use the annualized income installment method, the taxpayer will need to either estimate the amount of tax for the instant taxable year, or it will need to pay the "safe harbor" amounts in order to avoid a penalty.

  2. There are some who believe that income derived from pass-through entities (estates, trusts, partnerships and subchapter S corporations) is excludible from the estimated tax requirements because such income is not known until Schedule K-1 is received after the close of the taxable year. This belief is not supported by law or regulation. Refer to IRM 20.1.3.1.5.5 for additional information.

  3. If an incomplete Form 2220 is received, return it to the taxpayer with the applicable CRX letter. Inform the taxpayer the Form 2220 must be completed before any adjustment action can be considered.

21.7.7.4.23.2.5  (01-01-2012)
Credit Elect

  1. Credit elects are transferred using the later of the due date of the return (plus one month for MFT 02) or the transaction date creating the overpayment. In most cases, the credit elect is transferred using the due date, which is the 15th day of the 5th month. Because the first installment is due the 15th day of the 4th month, IDRS will consider the credit elect as timely for the first installment.

  2. When using the PC to compute the penalty, the date must be changed to the 15th day of the 4th month.

21.7.7.4.24  (01-01-2012)
Reasonable Cause Background

  1. Reasonable cause is based on all the facts and circumstances in each situation and allows the Service to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations.

  2. Reasonable cause relief is not available for all penalties. However, other exceptions may apply. For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but was unable to comply with a prescribed duty within the prescribed time, will be considered. (See Penalty Relief-Application Chart below).

  3. When considering the information provided, remember that an acceptable explanation is not limited to those given in IRM 20.1.1. Penalty relief granted because the taxpayer provided an "other acceptable explanation" is identified by use of PRC 30 on either the closing or adjustment document. The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer's failure to comply with the law was not due to willful neglect. Taxpayers have reasonable cause when their conduct justifies the non-assertion or abatement of a penalty.

  4. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified:

    • What happened and when did it happen?

    • During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, or otherwise complying with the law?

    • How did the facts and circumstances prevent the taxpayer from complying?

    • How did the taxpayer handle the remainder of their affairs during this time?

    • Once the facts and circumstances changed, what attempt did the taxpayer make to comply?

  5. Penalties exist to encourage voluntary compliance by supporting the standards of behavior expected by the Internal Revenue Code. For most taxpayers and organizations, voluntary compliance consists of preparing an accurate return, filing it timely, and paying any tax due. Efforts made to fulfill these obligations constitute compliant behavior. Most penalties apply to behavior that fails to meet any or all of these obligations.

  6. Penalties encourage voluntary compliance by:

    • Defining standards of compliant behavior

    • Defining remedial consequences for noncompliance

    • Providing monetary sanctions against taxpayers who do not meet the standard

    These three factors support the public conviction that the tax system is fair and the penalty is in proportion to the severity of the noncompliance.

  7. Although penalties support and encourage voluntary compliance, they also serve to bring additional revenues into the Treasury, impose remedial charges against taxpayers, and indirectly fund enforcement costs. However, these results are not reasons for creating or imposing penalties.

  8. The Service's approach to penalty administration must ensure:

    • Consistency - The Service should apply penalties equally in similar situations. Taxpayers base their perceptions about the fairness of the system on their own experience and the information they receive from the media and others. If the Service does not administer penalties uniformly (guided by the applicable statutes, regulations, and procedures), overall confidence in the tax system is jeopardized.

    • Accuracy - The Service must arrive at the correct penalty decision. Accuracy is essential. Erroneous penalty assessments and incorrect calculations confuse taxpayers and misrepresent the overall competency of the Service.

    • Impartiality - Service employees are responsible for administering the penalty statutes in an even handed manner that is fair and impartial to both the government and the taxpayer.

    • Representation - Taxpayers must be given the opportunity to have their interests heard and considered. Employees need to take an active and objective role in case resolution so that all factors are considered.

    Every function in the Service has a role in proper penalty administration. It is essential that each function conduct its operations with an emphasis on promoting voluntary compliance.

  9. The following objectives should be kept in mind when handling each penalty case:

    • Similar cases and similarly situated taxpayers should be treated alike.

    • Each taxpayer should have the opportunity to have their interests heard and considered.

    • Strive to make a good decision in the first instance. A wrong decision, even though eventually corrected, has a negative impact on voluntary compliance.

    • Provide adequate opportunity for incorrect decisions to be corrected.

    • Treat each case in an impartial and honest way (i.e., approach the job, not from the government's or the taxpayer's perspective, but in the interest of fair and impartial enforcement of the tax laws).

    • Use each penalty case as an opportunity to educate the taxpayer, help the taxpayer understand their legal obligations and rights, and assist the taxpayer in understanding their appeal rights and, in all cases, observe the taxpayer's procedural rights.

    • Endeavor to promptly process and resolve each taxpayers case.

    • Resolve each penalty case in a manner that promotes voluntary compliance.

  10. Reasonable cause does not exist if, after the facts and circumstances that explain the organization's noncompliant behavior cease to exist, the organization fails to comply with the tax obligation within a reasonable period of time. For more information regarding reasonable cause, refer to IRM 20.1.1.

  11. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  12. If the explanation does not fall within one of the reasonable causes enumerated below, the tax examiner will decide whether, in their opinion, the statement of facts submitted by the organization establishes a reasonable cause for delinquency. A cause for delinquency which appears to a person of ordinary prudence and intelligence as a reasonable cause for delay in filing a return and which clearly indicates no willful intent to disobey the taxing statutes, will be accepted as reasonable. In cases where ignorance of the law is claimed, reasonable cause should not be presumed.

  13. Each case must be determined on its own merit. Ignorance of the law can be considered for reasonable cause only if other facts support this contention, such as first-time filers. The organization should evidence ordinary business care and prudence and the case should be judged on its own merits.

21.7.7.4.24.1  (01-01-2012)
Undue Hardship

  1. Many explanations from organizations may refer to paying the penalty as an "undue hardship" . In determining if this explanation applies, keep in mind the following:

    • Undue hardship generally does not affect a person's ability to file and therefore would not provide a basis for penalty relief in a failure to file situation. However, each request must be considered on a case-by-case basis.

    • An undue hardship may support the granting of an extension of time for paying a tax or deficiency. Treas. Reg. 1.6161-1(b) provides that an undue hardship must be more than an inconvenience to the taxpayer. The taxpayer must show that they would sustain a substantial financial loss if forced to pay a tax or deficiency on the due date.

  2. Additional information to consider when evaluating a request for penalty relief includes, but is not limited to, the following:

    • When did the taxpayer know they could not pay?

    • Why was the taxpayer unable to pay?

    • Did the taxpayer explore other means to secure the necessary funds?

    • What did the taxpayer supply in the way of supporting documentation, such as copies of bank statements?

    • Did the taxpayer pay when the funds became available?

    Reasonable Cause Penalty Relief Criteria
    Note: Penalties under IRC 6685 and IRC 6711 may not be waived for reasonable cause.
    * The return was mailed in time but was returned to sender.
    * The return was filed in time but sent or deposited to the wrong IRS office.
    * Delay or failure to file was due to erroneous information given to the taxpayer by an IRS employee.
    Note: See IRM 20.1.1.3.3.4.2 for additional discussion of facts that should be taken into consideration when dealing with penalty relief due to erroneous oral advice given by an IRS employee.
    * Delay was caused by unavoidable absence of the taxpayer (see" Note" below).
    Note: In the case of a corporation, estate, trust, etc., the death, illness or absence must have been of an individual (or a member of the individual's immediate family) having sole authority to execute the return.
    * Delinquency was caused by destruction by fire or other casualty of the taxpayer's place of business or business records.
    * Taxpayer claims they relied on the advice of a competent tax advisor. (See Note below).
    Note: This may constitute reasonable cause if the taxpayer contacted a tax advisor who is competent on the specific tax matter and the taxpayer furnished necessary and relevant information but was incorrectly advised.
    * Taxpayer requested the proper forms in a timely fashion but the forms were not furnished in sufficient time to permit the timely filing of the return.
    * Taxpayer provides proof that he/she personally visited an IRS office on or before the due date of the return for the purpose of securing information or advice and was unable to meet with an IRS representative.
    If the organization is a PRIVATE FOUNDATION : The organization has ninety (90) days to file and pay after it receives a determination letter from the Service. (See Rev. Proc. 79-8 below)
    Rev. Proc. 79-8 This Rev. Proc. allows a private foundation (Form 990-PF ) reasonable cause for failure to file and failure to pay for 90 days after it received a determination letter from the Service stating that the organization is a private foundation or that it cannot reasonably be expected to be a public charity. This relief DOES NOT apply to returns or schedules that would have been due whether or not it was a private foundation (for example Form 990-T). A copy of the redetermination letter should be attached to the return. The date of the redetermination is not shown on IDRS. (See Form 990-PF for more information).
    If the organization is NOT A TAX-EXEMPT ORGANIZATION WITH UBIT OR NOT A PRIVATE FOUNDATION (Not a Form 990-T or Form 990-PF filer), is a membership organization (PTA, Boy Scout Troop, Garden Club, Homeowners Assoc, etc.), and has no full-time employee responsible for administering the organization's finances, reasonable cause may be granted if the organization:
    Clearly shows it exercised normal care and prudence but was unable to timely file the return due to little continuity or understanding of duties due to frequent officer changes, or
    Has no prior history of late filing and claims ignorance of the law (new organizations or those not previously required to file).
    See IRM 20.1 for additional discussion of Penalty Relief.

21.7.7.4.25  (01-01-2012)
Penalty Reason Codes

  1. Penalty Reason Codes (PRC) are required when inputting penalty relief transactions manually (Document Code 47 and 54). A penalty reason code must be used when granting full or partial penalty relief.

  2. Enter Penalty Reason Codes in the 4th Reason Code Position. See IRM 20.1, Penalty Reason Codes, for more information.

  3. Refer to the table below in determining the correct PRC for penalty abatements.

    Penalty Reason Code (PRC)
    Computer Generated
    Origin
    1st Position     		Penalty
    Reason
    Code
    4th Position     		Definition
    Reasonable
    Cause
    (062)         		 
      022 Normal business care and prudence followed, but taxpayer was still unable to comply due to circumstances beyond their control.
      024 IMF – Death, serious illness or unavoidable absence of the taxpayer or their immediate family member.
      025 Records inaccessible
      026 BMF – Death, serious illness or unavoidable absence of the party responsible for filing and/or paying taxes (i.e., owner, corporate officer, partner, etc.) or their immediate family member.
      030 Other – Combination of mistakes. Normal business care and prudence not followed, but documentation shows non-compliance was due to circumstances beyond the taxpayer's control.
      071 Limited Form 990-PF — Allows a private foundation reasonable cause for FTF and FTP 90 days after it received a determination letter from the Service stating the organization is a private foundation or it cannot be reasonably expected to be a public charity.
      072 Membership organization (67) has no full-time employees responsible for administering finances and exercised normal care and prudence (MFT 67).
      073 Membership foundation and the organization has no full-time employees responsible for administering finances, and has no prior history of late filing (MFT 67).
    General
    Penalty
    Relief         		 
      018 First-time penalty relief. RCA not used-manual 3-year lookback for compliant behavior.
      021 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      023 Taxpayer relied on practitioner or third party advice
      027 Timely mailed or timely filed
      028 Official Disaster Area
      029 Undue economic hardship/inability to pay (FTP)
    Administrative Waiver  
      043 Administrative Waiver
    Statutory Waiver  
      044 Erroneous or Late Written Advice by IRS. Relief based on Revenue Procedures.
    Systemic  
      013 Amended/Corrected Return. Original prepared by IRS. (SFR/6020B)
      016 TP computation error (Form 2210/2220)
    Service  
      015 General Service Error.
    Specific instruction for use of this code would be released in IRM updates or SERP Alerts.
      031 Erroneous oral advice from the Service.
      045 IRS Error. Math Error in computing penalties. Extensions to file not posted to Master File. Taxpayer complied with law but IRS did not recognize compliance.

21.7.7.4.26  (01-01-2012)
CP 259, CP 42X & CP 249 Entity Notices

  1. Taxpayer Delinquent Returns Notices and Taxpayer Delinquent Investigations (TDIs) are issued from Master File on accounts that have not received a return (Form 990,Form 990-EZ,Form 990-PF,Form 990–T,Form 990-N andForm 5227) to satisfy the filing requirement.

  2. The Entity Function receives and processes the CP 259 (A to G), CP 425 to 430, and CP 249 (A to C) EO delinquency notice series. The CP 259 notice series replaced the previous CP 420 – 424 notices. If any of the following CP notices or related correspondence is received in EO Accounts, route them to the Entity Unit for resolution.

    EO Return Delinquency Notices
    First Notice Series Form
    CP 259A 990
    CP 259B 990-PF
    CP 259C Presumptive 990-PF
    CP 259D 990-T
    CP 259E 990-N (e-Postcard)
    CP 259F 5227
    CP 259G 1120-POL
    Second Notice Series Form
    CP 425 990
    CP 426 990-PF
    CP 427 Presumptive 990-PF
    CP 428 990-T
    CP 429 5227
    CP 430 1120-POL
    Section 527 Political Organization Notices
    CP 249A Form 8871
    Not Filed notice
    CP 249B Form 8872
    Filed late notice
    CP 249C Form 8872
    Not filed notice

21.7.7.4.27  (01-01-2012)
Discovered Remittance Guidelines

  1. All employees who discovered remittance must prepare a Form 3244 or other posting document (i.e., ENMOD print) and immediately notify their team manager or designee. If the remittance is discovered attached to an unnumbered tax return, a Form 3244 is not required. The remittance must be left attached to the unnumbered return. A team designee must be available at all times during business hours to receive discovered remittances.

  2. If a posting document other than Form 3244 is used (i.e., ENMOD print), only the following information must be present on the document.

    • ENMOD print with entity information (name, address, city, state & zip code)

    • Transaction Code

    • MFT

    • Tax Period

    • Amount of Remittance

  3. Each team manager or designee will record and maintain a daily master Form 4287 log to record discovered remittances. After recording the remittance on the master log, the remittances will be placed in a locked container according to IRM 1.16.1, Physical Security Standards.

  4. At least once per day, the manager or designee will remove the remittances from the locked container. The manager will determine the most expeditious, secure method of getting the items to the Remittance Perfection unit (most functions hand-carry).

  5. A designated team employee will hand-carry the remittances and a copy of the master Form 4287 to the Remittance Perfection unit. The remittances must be in a lockable pouch.

  6. The receiving employee in Remittance Perfection will initial and date beside each of the remittances recorded on the Form 4287 to indicate the remittance has been received. They will provide a photocopy of the initialed Form 4287 to the sending team manager, designee or team employee.

  7. At least once per week, the team manager or designee will reconcile the returned copy of Form 4287 to the original master Form 4287. The purpose of the reconciliation is to ensure that all remittances sent to the Remittance Perfection unit were received. Both the original and returned copy of Form 4287 will be retained for one year.

21.7.7.5  (01-01-2012)
Tax Exempt and Tax Credit Bonds (TEB)
Background

  1. The Tax Reform Act of 1986 requires all Issuers of Tax Exempt Bonds (TEB) to file information returns with the Internal Revenue Service after December 31, 1986. Tax exempt bonds (also known as municipal bonds) differ from taxable bonds in that the interest paid on these bonds is excluded from gross income. That is, the interest income is not includable in the gross income of the bondholders for Federal tax purposes as long as the bonds meet Federal tax laws and regulations.

  2. Since the interest paid on the bonds is excluded from gross income for Federal tax purposes, investors are willing to purchase bonds at lower interest rates than for taxable bonds. Governments benefit by issuing tax exempt bonds because the lower interest rates result in substantial savings.

  3. Section 1531 of Title I of Division B of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 155 (2009) (enacted February 17, 2009) (ARRA), added section 54AA to the Code, authorizing state and local governments to issue two types of taxable Build America Bonds in lieu of issuing tax-exempt bonds.

  4. Section 301 of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, 124 Stat. 71 (2010) (the “HIRE Act”) added subsection (f) to § 6431 of the Code, which authorizes issuers to elect irrevocably to receive Federal direct payments of allowances of refundable tax credits to subsidize a prescribed portion of their borrowing costs instead of the Federal tax credits that otherwise would be allowed to holders of certain qualified tax credit bonds under § 54A.

  5. Other general information is listed below:

    • Form 8038, Form 8038-B, Form 8038-G, Form 8038-GC, and Form 8038-TC are one time filings only.

    • With the exception of Form 8038-CP, there is no statute of limitations on the Form 8038 series.

    • Form 8038 series have a 25/30 year retention period.

    • The tax period is based on the Date of Issue on Form 8038, Form 8038-G, Form 8038-GC, Form 8038-B, Form 8038-TC, Form 8030-T and Form 8328. The tax period on Form 8038-CP is based on the Interest Payment Date.

    • More than one Form 8038 series return can be filed for the same EIN, in the same tax period.

    • Form 8038-T are the only returns that should have money.

    • Claims are worked in the Area Offices.

  6. TEB amended returns and correspondence issues, with the exception of Form 8038-CP, are worked in the Ogden Accounts Management Campus, EO Accounts Team. However, Form 8038-CP inquiries or amended returns must be referred to the Field.

21.7.7.5.1  (01-01-2012)
Description of Bonds

  1. Municipal Bonds may be classified as tax-exempt government or qualified private activity bonds. Municipal bonds may also be issued as governmental bonds or non-governmental bonds. Non-governmental bonds are also called "Qualified Private Activity Bonds" . In addition, states and municipalities may issue special taxable bonds (known as direct pay bonds)

  2. Bonds are defined as an "obligation" of any State or political subdivision thereof. An obligation is a legal obligation by a governmental entity, for governmental or qualified purposes. Income from certain other obligations of states and their political subdivisions may likewise be excluded from gross income. Such obligations include:

    • Installment sales contracts

    • Equipment leases

    • Bank loans

  3. Obligations are not limited to bonds or other securities. They may also include written contracts such as installment sales contracts and loans to a municipality.

  4. Refer to Publication 3755, Tax Exempt Bonds Filing Requirements, for a quick reference to commonly asked filing requirement questions.

  5. The two primary types of tax exempt bonds are Governmental bonds and Qualified Private Activity bonds.

    • Governmental Bonds are issued to finance activities owned and operated by a state or local government. That is, the governmental entity uses the bond proceeds for its own purposes and will own the bond-financed facility. Certain lease arrangements may be treated as tax exempt bonds when the lease transaction is treated as a conditional sales contract.

      Example:

      Funds are used to finance the building, maintenance and repair of highways, schools, or other government buildings such as courthouses.

    • Qualified Private Activity Bonds may be issued by state and local governments and the bond proceeds are used by non-governmental entities. In order to be a qualified private activity bond, the bond must be issued for one of the purposes specified in IRC 142, IRC 143, IRC 144, IRC 145. These purposes include:

    IRC 142 Exempt Facility Bonds Finance:

    • Airports;

    • Docks and wharves;

    • Mass commuting facilities or facilities for the furnishing of water;

    • Sewage facilities;

    • Solid waste disposal facilities;

    • Qualified residential rental projects;

    • Facilities for the local furnishing of electric energy or gas;

    • Local district heating or cooling facilities;

    • Qualified hazardous waste facilities;

    • High-speed intercity rail facilities;

    • Environmental enhancements of hydroelectric generating facilities;

    • Qualified public educational facilities;

    • Qualified green building and sustainable design projects;

    • Qualified highway or surface freight transfer facilities (IRC 142(a)).

    • Recovery Zone Property (IRC 1400U-3)
    IRC 143 Bonds Finance:

    • Mortgage revenue bonds;

    • Qualified mortgage bonds or

    • Qualified veterans mortgage bonds.
    IRC 144 Bonds Finance:

    • Qualified Small Issue Bonds;

    • Qualified Student Loan Bonds and

    • Qualified Redevelopment Bonds

    Note:

    All Student Loan Bond correspondence or inquiries are routed to:
    Internal Revenue Service
    TE/GE (SE:T:GE:TEB:CPM)
    TEB Compliance and Program Management
    1111 Constitution Ave, NW, PE-5P7
    Washington, DC 20224

    IRC 145 Bonds Finance:

    • Qualified IRC 501(c)(3) bonds

      Example:

      A county needs a nursing home in its community. It loans bond proceeds to a 501(c)(3) corporation that will construct the facility. The facility, after construction, will be run by the 501(c)(3).

  6. Pooled Financing may involve proceeds of governmental bonds or certain types of private activity bonds. In a pooled financing, the proceeds of the bonds are loaned by the Issuer to more than one borrower. The borrower of the proceeds may be tax-exempt organizations or other state or local governments.

    Example:

    The State issues a bond and loans the proceeds to multiple school districts. One school uses the proceeds to buy computer equipment. Another school used the proceeds to construct administrative offices.

  7. Registered Warrants is a short term obligation (30-60 day bond) of a municipality.

  8. Commercial Paper Bonds is a short term bond having a maturity date of 270 days or less. These bonds are issued pursuant to a commercial paper program that is treated as part of a single issue.

  9. Commercial Paper Program is a program to issue commercial paper to finance or refinance the same governmental purpose pursuant to a master legal document.

  10. Lease Installment Sales is an unconditional sales agreements under which a municipal government leases equipment that it acquires at the end of the lease period.

  11. Promissory Note is an interest bearing certificates of governments that come due in a shorter time than bonds. Municipal notes have maturities up to approximately one year.

  12. Lines of Credit are pre-approved loans where the municipality draws down money as it is needed. The loans have specified dollar limits, terms and interest rates. This is similar to a home equity loan of a homeowner.

  13. Green Bond is issued to finance projects designated by the Secretary after consultation with the Administrator of the Environmental Protection Agency. Green building and sustainable design projects must meet certain eligibility requirements.

21.7.7.5.1.1  (01-01-2012)
New York Liberty Bonds

  1. Due to the September 11, 2001 terrorist attack, the Service provided guidance (Notice 2002–42, 2002-27 IRB 36) on the effects of various tax benefits that were enacted for areas of New York City. The Service provided additional guidance in Notice 2003-40,2003-27 IRB 10.

  2. Section 1400L(a) provides for a new targeted group for the Work Opportunity Tax Credit (WOTC): New York Liberty Zone business employees. The new targeted group includes individuals who perform substantially all of their services in the New York Liberty Zone (NYLZ), and may include individuals who perform substantially all of their services elsewhere in New York City for a business that relocated from the NYLZ due to the physical destruction or damage of its workplace within the NYLZ by the September 11, 2001 terrorist attack.

  3. Section 1400L(d) creates a new type of tax-exempt bond known as Qualified New York Liberty bonds.

  4. Sections 1400L(e) provides for additional refunding of certain tax-exempt bonds.

21.7.7.5.1.2  (01-01-2012)
Gulf Zone Tax Credit, Gulf Opportunity Zone Bonds,
Midwestern Bonds and Hurricane Ike Bonds

  1. The Gulf Zone Tax Credit and Gulf Opportunity Zone Bonds are due to the Hurricane Katrina disaster area determined by the President to warrant individual or individual and public assistance from the Federal Government. The Service provided guidance (Notice 2006-41), which authorizes the states of Alabama, Louisiana and Mississippi to issue certain exempt facility bonds and qualified mortgage bonds pursuant to sub section 1400N(a), (Gulf Opportunity Zone Bonds), advance refunding bonds pursuant to sub section 1400N(b) (Gulf Opportunity Zone Advance Refunding Bonds) and tax credit bonds pursuant to sub section 1400(N)(I) (Gulf Tax Credit Bonds).

  2. Gulf Opportunity Zone Bonds and Gulf Opportunity Zone Advance Refunding Bonds must be issued by January 1, 2011.

  3. Gulf Tax Credit Bonds had to be issued by January 1, 2007.

  4. Midwest Disaster Bonds, Midwestern Tax Credit Bonds and Hurricane Ike Bonds were added by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) for areas impacted in 2008 by the severe storms and flooding in the midwest or by Hurricane Ike.

21.7.7.5.1.3  (01-01-2012)
Build America Bonds

  1. Section 1531 of Title I of Division B of the American Recovery and Reinvestment Act of 2009 (ARRA), Pub. L. No. 111-5, 123 Stat. 115 (2009) (enacted February 17, 2009) added sub section 54AA to the Code, authorizing state and local governments, at their option, to issue two general types of Build America Bonds as taxable governmental bonds with Federal subsidies for a portion of their borrowing costs. The subsidies take the form of either tax credits provided to holders of the bonds or refundable tax credits paid to state and local governmental Issuers of the bonds. Build America Bonds have different levels of Federal subsidies and program requirements depending on the particular type of bond. The bonds must be issued before January 1, 2011.

  2. The first type of Build America Bond provides a Federal subsidy through Federal tax credits to investors in the bonds in an amount equal to 35 percent of the total coupon interest payable by the Issuer on taxable governmental bonds (net of the tax credit), which represents a Federal subsidy to the state or local governmental Issuer equal to approximately 25 percent of the total return to the investor (including the coupon interest paid by the Issuer and the tax credit). This type of Build America Bond is referred to as "Build America Bonds (Tax Credit)" .

  3. The second type of Build America Bond provides a Federal subsidy through a refundable tax credit paid to state or local governmental Issuers by the Treasury Department and the Internal Revenue Service in an amount equal to 35 percent of the total coupon interest payable to investors in these taxable bonds. This type of Build America Bond is referred to as "Build America Bonds (Direct Payment)" . The level of the 35 percent Federal interest subsidy on Build America Bonds (Direct Payment) is deeper than the corresponding approximately 25 percent Federal interest subsidy on Build America Bonds (Tax Credit). The service provided additional guidance regarding Build America Bonds in Notice 2009-26.

  4. See IRM 21.7.7.5.2.4 for additional information regarding Form 8038-CP.

21.7.7.5.1.4  (01-01-2012)
Recovery Zone Economic Development Bonds

  1. Section 1401 of of the ARRA added sub section 1400U-2 to the Code to authorize state and local governments to issue Recovery Zone Economic Development Bonds (Direct Payment). These bonds are treated as qualified bonds for purposes of Section 6431 and they have a deeper refundable credit subsidy than Build America Bonds (Direct Payment) equal to 45 percent of the total coupon interest payable to investors in these taxable bonds. The service provided additional guidance regarding Recovery Zone Economic Development Bonds in Notice 2009-50.

  2. In particular, sub section 1400U-2(b) defines the term "Recovery Zone Economic Development Bond" to mean a bond that is issued as part of an issue that meets the following requirements:

    1. The bond is a Build America Bond.

    2. The bond is issued before January 1, 2011.

    3. 100 percent of the excess of (i) the available project proceeds (as defined in percent of such proceeds used to pay issuance costs plus investment proceeds thereon), over (ii) the amounts in a reasonably required reserve fund (within the meaning of sub section 150(a)(3)) with respect to such issue, are to be used for one or more qualified economic development purposes (as defined in sub section 1400U-2(c)).

  3. The Issuer designates such bond for this purpose.

  4. See IRM 21.7.7.5.2.6, Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds, for additional information.

21.7.7.5.1.5  (01-01-2012)
TEB Terms and Definitions

  1. The following definitions are applicable to Tax Exempt Bonds.

    TERM DEFINITION
    Conduit Borrower The borrower of proceeds that is other than the Issuer. The conduit borrower is required to make payments to the Issuer in such amounts and at such times to permit the Issuer to make timely payments of debt service on the bonds.
    Credit Enhancers A credit enhancer is a party unrelated to the Issuer or conduit borrower who lends its credit to the payment of debt service on the bonds. As a result, the bonds bear a lower interest rate than they would have without the credit enhancer. Credit enhancement may be in the form of mortgage insurance, bond insurance, guarantee, or letter of credit.
    CUSIP This is an acronym for Committee on Uniform Securities Identification Procedures. This is a number assigned to individual securities.
    Date of Issue This is usually the date on which the Issuer physically exchanges the bonds that are part of the issue for the underwriter's (or other purchaser's) funds. It can never be earlier than the date interest starts to accrue.
    Depository A depository is an organization that holds the actual municipal bonds and maintains records on its books.
    Issuer The name of the entity issuing the bonds, not necessarily the name of the entity receiving the benefit of the financing.
    Final Maturity Date The date on which the entire outstanding principal of the bond must be paid to the bondholder.
    Financial Advisor The financial advisor is an entity that advises the Issuer regarding financial matters related to the issuance of its bonds. A conduit borrower may also have its own financial advisor.
    Report Number A unique three digit numeric number that is assigned to each return during processing. This assists in identifying the specific bond issuance received in the service center for a specific EIN and tax period. (See 21.7.7.5.2(6) for valid Report Number ranges.)
    TEB Acronym for Tax Exempt Bond
    Trustee A trustee is an entity who represents the bondholders and acts on their behalf when necessary. The trustee holds unexpended bond proceeds and other funds (e.g., debts service fund, reserve fund, etc.). The trustee generally receives the debt service payments from the Issuer or conduit borrower and pays the payments to the bondholders.
    Underwriter An underwriter is an entity that purchases the bonds from the Issuer and resells them to the bondholders.

21.7.7.5.1.6  (01-01-2012)
Acknowledgments

  1. Organizations often request acknowledgments that IRS received their filing of a TEB return. A letter may be attached to the bond, from the preparer, requesting a date stamped copy be returned. When a copy of the letter or form requests an acknowledgment, Receipt and Control will date stamp the copy, return it to the initiator and annotate on the original, "ACK sent" .

  2. If an acknowledgment request has been overlooked by R&C or the Issuer is requesting acknowledgment of a previously filed TEB return, the correspondence is routed to and worked in OAMC, EO Accounts Unit, MS: 6552.

    Note:

    Acknowledgments will not be sent on Forms 8038-CP

21.7.7.5.2  (01-01-2012)
Form 8038 Series and Form 8328 TEB Returns
General Information

  1. Tax Exempt Bond Issuers are required to file Form 8038, Form 8038-B, Form 8038-G, Form 8038-GC, Form 8038-TC, Form 8038-T, or Form 8328 under certain circumstances, for bond and various other issues. These returns are submitted to and processed by the Ogden Submission Processing Campus.

  2. A TEB return can be identified by the:

    • MFT

    • Doc Code

    • Report Number

  3. The tax period on Form 8038, Form 8038-B, Form 8038-G, Form 8038-GC, Form 8038-TC, Form 8038-T, and Form 8328 is determined based on the "Date of Issue" .

  4. For Form 8038-CP, the tax period is determined based on the "Interest Payment Date" .

  5. Since numerous returns can be filed under one tax period, a unique three digit numeric "Report Number" is assigned to each return. This assists in identifying each specific bond issuance received in the service center for a specific EIN and tax period.

  6. The table below provides the specific form type, MFT, Doc Code, and Report Number as it applies to each TEB return. The Tax Class for all TEB returns is 3.

    Form MFT Doc Code Report Number
    8038 46 61 100 – 199
    8038-B 85 85 100 – 499
    8038-CP 46 88 800 – 899;
    200 – 299 or
    400 – 499
    8038-G 46 62 300 – 399
    8038-GC 46 72 500 – 599
    8038-TC 86 86 100 – 499
    8038-T 46 74 700 – 799
    8328 46 75 900 – 999

  7. Each tax module will consist of the MFT, tax period and a unique three digit report number. In order to identify the correct report number, research BMFOLI prior to editing and assigning a new report number. For Form 8038-CP contact GECU before editing and assigning a new report number.

  8. If correspondence, amended returns, claims, etc., related to these forms are received anywhere other than the Ogden campus, route to the address shown below.


    Internal Revenue Service
    MS: 6552
    Ogden, UT 84201

21.7.7.5.2.1  (01-01-2012)
Form 8038, Information Return for Tax Exempt Private Activity Bond Issues

  1. Form 8038 is used by the Issuers of tax exempt private activity bonds to provide IRS with information required by IRC 149. The MFT is 46, tax class is 3 and the Document Code is 61.

  2. The due date is the fifteenth day of the second calendar month after the close of the calendar quarter in which the bond was issued.

  3. The valid report number range for this form is 100 - 199.

21.7.7.5.2.2  (01-01-2012)
Form 8038-B, Information Return for Build America Bonds
and Recovery Zone Economic Development Bonds

  1. Form 8038-B is used by Build America Bond Issuers of tax exempt bonds to solely report Recovery Zone Economic Development bonds or Build America Bonds. The MFT is 85, tax class is 3 and the Document Code is 85.

  2. The due date is the fifteenth day of the second calendar month after the close of the calendar quarter in which the bond was issued.

  3. The valid report number range for this form is 100 - 499.

21.7.7.5.2.3  (01-01-2012)
Form 8038-G, Information Return for Tax Exempt Governmental Obligations

  1. Issuers of tax exempt governmental obligations with issue prices of $100,000 or more (Part III, line 21, column b on Form 8038-G) must file Form 8038-G. Form 8038-G is used to provide IRS with information required by IRC 149.

  2. The due date is the fifteenth day of the second calendar month after the close of the calendar quarter in which the bond was issued. The MFT is 46, tax class is 3 and the Document Code is 62.

  3. The valid report number range for this form is 300 - 399.

21.7.7.5.2.4  (01-01-2012)
Form 8038-TC, Information Return for Tax Credit Bonds

  1. Form 8038-TC is used by Issuers to report tax credit bonds other than BABs as required by IRC 149(a). The MFT is 86, tax class is 3 and the Document Code is 86.

  2. The due date is the fifteenth day of the second calendar month after the close of the calendar quarter in which the bond was issued.

  3. The valid report number range for this form is 100 - 499.

21.7.7.5.2.5  (01-01-2012)
Form 8038-GC, Information Return for Small Tax Exempt Governmental Bond Issues,
Leases, and Installment Sales

  1. Issuers of tax exempt governmental obligations with issue prices of less than $100,000 must file Form 8038-GC. Form 8038-GC provides IRS with information required by IRC 149. The return is either filed separately for each issue of less than $100,000 or as a consolidated return for all issues of less than $100,000 each within the calendar year.

  2. For single issues, the due date for Form 8038-GC is the 15th day of the 2nd calendar month after the close of the quarter in which the bond was issued. For consolidated returns, the Form 8038-GC is due on or before February 15th of the calendar year following the year in which the bond was issued. The MFT is 46, tax class is 3 and the Document Code is 72.

  3. The valid report number range for this form is 500 - 599.

21.7.7.5.2.5.1  (01-01-2012)
Due Date Chart for Form 8038, Form 8038-B,
Form 8038-G, Form 8038-GC and Form 8038-TC

  1. The following table outlines the due dates for Form 8038, Form 8038-B, Form 8038-G, Form 8038-TC and Form 8038-GC (single & consolidated):

    Month of Issuance Quarter Ending Date Due Date Due Date
    Form 8038-GC (Consolidated returns only)
    January
    February
    March         		03-31 05-15
    		 02-15
    April
    May
    June         		06-30 08-15 02-15
    July
    August
    September         		09-30 11-15 02-15
    October
    November
    December         		12-31 02-15 02-15

21.7.7.5.2.5.2  (01-01-2012)
Extension of Time to File Form 8038, Form 8038-B,
Form 8038-G, Form 8038-GC and Form 8038-TC

  1. An Issuer may be granted an extension of time to file Form 8038, Form 8038-BForm 8038-GC or Form 8038-T by following the procedures outlined in Rev. Proc. 2002-48, 2002–37 I.R.B. 531. To request an extension the Issuer must:

    1. Enter on the top of Form 8038, Form 8038-B, Form 8038-GC or Form 8038-T, "Request for relief under section 3 of Rev. Proc. 2002-48" .

    2. Attach a statement to the return explaining why the return was not timely submitted to the IRS, and

    3. Indicate whether the bond issue in question is under examination (if known).

  2. All extension of time to file requests are submitted with the original return and processed in the Ogden Submission Processing Campus.

21.7.7.5.2.6  (01-01-2012)
Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds

  1. Form 8038-CP is used by Issuers of governmental bonds who elect to receive a direct payment from the Federal government equal to a percentage of the interest payments on these bonds. This form was created as a result of section 1401, Recovery Zone Bonds and section 1531, Build America Bonds, of the American Recovery and Reinvestment Act (ARRA) of 2009. The payment requested on Form 8038-CP relates to the interest paid on a single bond issue. The HIRE Act extended the direct pay provision to certain issuers of qualified tax credit bonds. In lieu of issuing bonds with a tax credit to the bondholder, issuers of new clean renewable energy bonds (New-CREBs), qualified energy conservation bonds (QECBs), qualified zone academy bonds (QZABs), and qualified school construction bonds (QSCBs) may elect to receive a direct payment equal to a certain amount of the interest paid on an interest payment date (specified tax credit bonds). For more information refer to Notice 2010-35.

  2. The MFT is 46, tax class is 3 and Doc Code is 88.

  3. Valid report number ranges for this form are 800 - 899, 200 - 299 and 400 - 499.

  4. The tax period is based on the "Interest Payment Date" reported on Form 8038-CP, line 18.

  5. A Form 8038-CP filed with respect to fixed rate bonds must be filed by a due date that is 45 days before the interest payment date. However, the form may not be submitted earlier than 90 days before the relevant interest payment date. Refer to the table shown below for due dates on fixed rate bonds.

  6. With respect to variable rate bonds, Issuers must aggregate all credit payments on a quarterly basis and file a Form 8038-CP for reimbursements in arrears by a due date that is 45 days after the last interest payment date within the quarterly period for which reimbursement is being requested.

  7. Each Form 8038-CP is reviewed for accuracy and completeness prior to processing the return. The form can report only one bond issue per return.

  8. All Forms 8038-CP require expedite processing in order to meet the 45 days interest period which is applicable to this return.

  9. The credit payment reported on line 22 of the form is sent to either the address shown in Part 1 of Form 8038-CP or directly deposited to the account number on Part III Line 25 Form 8038-CP.

21.7.7.5.2.6.1  (01-01-2012)
Form 8038-CP Due Date Chart

  1. Form 8038-CP return due dates are determined based on which box is checked in Part II, line 17c (variable or fixed rate issues). The return due date for Form 8038-CP is determined by using a Julian calendar (see Document 6209) and the applicable rate (fixed or variable) as indicated on the return (line 17c). Refer to the table below.

    Form 8038-CP Due Date
    Variable Rate
    If Then
    the "Variable Rate Issues" box is checked in Part II, line 17c, the return due date is 45 days AFTER the Interest Payment Date (Line 18 date).

    Example:

    Using 365 day Julian Calendar, the variable Interest Payment date on line 18 is 01-17-2010 (17 days) + (plus) 45 days (after the Interest Payment Date) = Day 62 = March 3, 2010 = Return Due Date.

    Form 8038-CP Due Date
    Fixed Rate
    the "Fixed Rate Issues " box is checked in Part II, line 17c, the return due date is 45 days BEFORE the Interest Payment Date (Line 18 date)

    Example:

    Using 365 day Julian Calendar, the fixed Interest Payment date on line 18 is 01-17-2010 (17) - (minus) 45 days (before the Interest Payment Date) = Day 337 = December 03, 2009 = Return Due Date

  2. Unlike other TEB returns, Form 8038-CP adheres to established statute guidelines as outlined below.

    • Assessment Statute Expiration Date (ASED) — Three (3) years from the return due date or three (3) years from the received date whichever is later.

    • Refund Statute Expiration Date (RSED) — Three (3) years from the received date of the original return or two (2) years from the date the tax penalty and/or interest is paid.

    • Collection Statute Expiration Date (CSED) — Generated 10 years from the assessment date.

  3. The impact of Form 8038-CP post processing issues in EO Accounts is not fully known. Refer to 21.7.7.5.4.4.7 for specific procedures associated with either Form 4442 or dupf resolution. It is imperative that all TEB tax examiners continue to alert their leads or managers immediately when Form 8038-CP inquiries/issues (other than stated above) are received. However, if there is any question associated with any Form 8038-CP case received in AM, alert the unit lead or manager. The lead or manager will contact the TEGE HQ analyst so procedures or guidance can be provided.

  4. Form 8038-CP correspondence or amended returns must not be scanned into the Correspondence Imaging System (CIS).

21.7.7.5.2.7  (01-01-2012)
Form 8038-T, Arbitrage Rebate, Yield Reduction and Penalty
in Lieu of Arbitrage Rebate

  1. Under IRC 148(f), interest on a state or local bond is not tax exempt unless the Issuer of the bond rebates to the United States on Form 8038-T rebatable arbitrage profits earned from investing proceeds of the bond in higher yielding nonpurpose investments.

  2. Issuers of tax-exempt bonds must file Form 8038-T to pay:

    • Yield reduction payments

    • A penalty for failing to pay yield reduction payments on time

    • Arbitrage rebate to the U.S.

    • A penalty for failing to pay on time the arbitrage rebate to the U.S.

    • A penalty in lieu of rebating arbitrage to the U.S.

    • A penalty to terminate the election to pay a penalty in lieu of rebating arbitrage

    • A penalty for failing to pay either penalty on time

  3. Generally, if the return is for "arbitrage rebate" or" yield reduction payments" , installments are due 60 days after the end of the fifth bond year. If the return is for "penalty in lieu of" , the return is due 90 days after the end of each six month period relating to the penalty. The MFT is 46, tax class is 3 and the Doc. Code is 74.

  4. The valid report number range for this form is 700 - 799.

  5. Correspondence requests for extension of time to pay Arbitrage Rebate or extension of time to file a return are worked in EO Accounts.

21.7.7.5.2.7.1  (01-01-2012)
Arbitrage

  1. Arbitrage is the purchase and sale of the same or equivalent security in different markets in order to profit from price differences. The term arbitrage applies to all types of investments.
    Example: A farmer sells corn in Village A for $5 per bushel. A restaurant owner in City B, located 50 miles away from Village A, buys corn in City B for $10 a bushel. A trucker is willing to transport corn from Village A to City B for $3 a bushel. If simultaneous contracts are entered into to:

    • buy corn from the farmer for $5

    • sell the corn to the restaurant owner for $10, AND

    • to transport the corn for $3, a $2 profit on each bushel would be realized

    The $2 profit is called arbitrage , which in this case arises from the difference between two geographically separate markets.

  2. In general, an Issuer may recover an overpayment of rebate for an issue of tax-exempt bonds by establishing to the IRS that the overpayment occurred. Form 8038-R is used to request recovery of amounts paid under rebate provision, including yield reduction payments.

  3. Route all Form 8038-T, Form 8038-R or correspondence referencing a "Claim for Refund of Arbitrage" to OAMC, EO Accounts, MS: 6552. Claims are no longer worked in the Bank Adjustment/Dishonored Check unit.

21.7.7.5.2.7.2  (01-01-2012)
Extension of Time to Pay Arbitrage Rebate
and File Form 8038-T

  1. Bonds may become taxable if the correct amount of arbitrage rebate is not paid in a timely manner accompanied by a Form 8038-T.

  2. Rev. Proc. 2005-40, 2005-2 C.B. 83, provides Issuers with procedures for correcting a failure to timely pay the proper amount of rebate accompanied by Form 8038-T. Similar procedures are provided in Rev. Proc. 90-11, 1990-1 C.B. 469, for bonds subject to § 1.148-1T of the temporary Income Tax Regulations initially published on May 12, 1989, as part of T.D. 8252.

  3. Generally, even if the Issuer does not meet the payment due date, rebate will be regarded as timely paid if the Issuer pays the rebate owed plus interest and files the Form 8038-T within 180 days after discovery of the failure to timely pay, unless the Commissioner determines that the failure to pay was not due to willful neglect or the issue is under examination. The payment and Form 8038-T must also include a detailed explanation of why the failure to timely pay was not due willful neglect. The Form 8038-T should have printed across the top "This Statement is Submitted in Accordance with Rev. Proc. 2005-40" or in limited cases "This Statement is Submitted in Accordance with Rev. Proc. 90-11" .

  4. The explanation must be signed under penalties of perjury and must include all relevant information, including when the rebate amount was required to be paid, why it was not timely paid, and a description of the events leading to both the failure to timely pay and the discovery of the failure.

  5. If the rebate amount is paid more than 180 days after the discovery of the failure to pay, the bonds will not be taxable if the Issuer files the Form 8038-T and pays the rebate amount, plus interest, plus a penalty amount, and the Commissioner determines that the failure was not due to willful neglect.

  6. Prior to the end of the 180-day period, the Issuer may request an extension of the 180-day period. After expiration of the 180 days, an Issuer may request a waiver of the penalty. An extension or waiver will be granted only in unusual circumstances.

21.7.7.5.2.8  (01-01-2012)
Form 8038-R, Request for Recovery of Overpayments
Under Arbitrage Rebate Provisions

  1. Form 8038-R is used by Issuers of state and local bonds to request a refund of amounts paid with Form 8038-T, Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate. Form 8038-R replaces the letter procedure of Rev. Proc. 92-83, 1992-2 C.B, 487.

  2. Payments made with Form 8038-T that may be recoverable include:

    • Yield reduction payments

    • The arbitrage rebate to the United States

    • A penalty in lieu of rebating arbitrage to the United States

    • A penalty to terminate the election to pay a penalty in lieu of rebating arbitrage

  3. An Issuer may recover an overpayment of rebate for an issue of tax-exempt bonds by establishing to the Internal Revenue Service that the overpayment occurred. An overpayment may be recovered only to the extent that a recovery on the date that it is first requested would not result in an additional rebate amount, if that date were treated as the computation date.

  4. The format and procedure for requesting recovery of arbitrage amounts paid are provided in section 3 of Rev. Proc. 2008-37, 2008-29 I.R.B. 137.

  5. All Form 8038-R, Form 8038-T or correspondence indicating "claim for refund" should be routed to and worked at OAMC, EO Accounts Units (MS: 6552). For additional information on TEB claim procedures, see IRM 21.7.7.5.4.6.

21.7.7.5.2.9  (01-01-2012)
Form 8328, Carryforward Election of Unused Private Activity Bond Volume Cap

  1. Form 8328 is filed by the issuing authority of private activity bonds to elect to carry forward its unused volume cap for one or more carry forward purposes (see IRC 146(f) ). If the election is made, bonds issued with respect to a specified carry forward purpose are not subject to the volume cap under IRC 146(a) during the three calendar years following the calendar year in which the carry forward arose. However, the exclusion applies only to the extent the amount of such bonds does not exceed the amount of the carry forward elected for that purpose.

  2. Once Form 8328 is filed, the Issuer may not revoke the carry forward election or amend the carry forward amounts shown on the form. The due date is the earlier of:

    • February 15 of the calendar year following the year in which the excess amount arises or

    • The date of issue of bonds issued pursuant to the carry forward election.

    The MFT is 46, tax class is 3 and the Document Code is 75.

  3. The valid report number range for this form is 900 - 999.

  4. Currently, all amended Form 8328 are processed as originals. If an amended Form 8328 is routed to EO Accounts in error, edit the return and send through to be processed.

21.7.7.5.3  (01-01-2012)
Mortgage Credit Certificate Elections, Notice of Defeasance
and Student Loan Bonds
Background and Purpose

  1. The section provides general background information about the following forms:

    • Mortgage Credit Certificate (MCC) Elections notification (correspondence)

    • Notice of Defeasance (correspondence)

    • Student Loan Bonds

  2. MCCs, Notice of Defeasance, and Student Loan Bonds are non-remit. Occasionally, remittance may be received for penalty payment. If remittance is received for a penalty payment, apply to the 20-2325 " Miscellaneous Forfeiture Receipts" account.

  3. The Ogden Submission Processing Campus establishes a fact of filing on "Mortgage Credit Certificates" , "Notice of Defeasance" and "Student Loan Bonds" . EO Entity receives batches of documents and perfects the documents prior to inputting the TC 971 and the applicable Action Code. After the 971 is entered the documents are routed to Files.

  4. All Mortgage Credit Certificate Elections, Notice of Defeasance or Student Loan Bonds received in EO Accounts should be routed to EO Entity (MS: 6273) for input of the TC 971 action.

  5. The "Fact of Filing" is located in the Entity section and can be accessed via CC ENMOD. Refer to the list below for the applicable AC related to each individual form:

    • Mortgage Credit Certificate Elections, TC 971 Action Code 344

    • Notice of Defeasance, TC 971 Action Code 345

    • Student Loan Bonds, TC 971 Action Code 314

21.7.7.5.3.1  (01-01-2012)
Mortgage Credit Certificate Election (MCC)

  1. Mortgage Credit Certificates provide qualified holders of the certificates with a credit against income tax liability. In general, an Issuer elects to establish a mortgage credit certificate program in lieu of issuing qualified mortgage revenue bonds. Section 25 of the Code permits states and political subdivisions to elect to issue Mortgage Credit Certificates in lieu of qualified mortgage revenue bonds. See section 25 and section 1.25–4T of the Regulations. The information that must be submitted in this election is contained in section 1.25–4T(c)(2) of the Regulations. A separate mortgage credit certificate election is filed for each program.

  2. A separate Mortgage Credit Certificate Election is filed for each program. The election must be filed with the Service on or before the earlier of:

    • December 31st of the year in which the election is made

    • The date of distribution of mortgage credit certificates under a program

21.7.7.5.3.2  (01-01-2012)
Notice of Defeasance

  1. Notices of Defeasance are written statements of irrevocable defeasance escrow established to redeem tax exempt bonds on their earliest call date.

  2. A separate Notice of Defeasance is filed for each escrow and the Notice is due within 90 days of the date of the establishment of the defeasance escrow.

21.7.7.5.3.3  (01-01-2012)
Student Loan Bonds

  1. Student Loan Bond notifications are written statements to notify the IRS that the Issuer is electing to issue a taxable bond.

  2. Student Loan bonds are due prior to the issuance of the taxable bond. For additional information, see temporary Regulations 301.9100-6T(c).

21.7.7.5.3.4  (01-01-2012)
TEB Fact of Filing Attachment Procedures

  1. When correspondence is received in EO Accounts relating to any of the above forms and it is determined that the information needs to be attached to the original document using Form 9856 , Attachment Alert, refer to the procedures outlined below:

    1. Research IDRS for the related TC 971 & action code

    2. Complete Form 9856 – (Verify the information is being attached to the correct DLN action code)

    3. Staple Form 9856 to the correspondence and route to Files to be associated with the TC 971 DLN

21.7.7.5.4  (01-01-2012)
Tax Exempt Bond Procedures

  1. The following procedures are outlined to assist in resolution of various TEB related issues that are received and resolved at the OAMC, EO Accounts Unit.

  2. Shown below are some of the various types of TEB correspondence issues that are received in EO Accounts:

    • Credit/Debit Module Balance Listing

    • Amended returns

    • Missing payments

    • Late/No replies to requests for missing or incomplete information

    • Late/No replies to Rev. Proc. 2002-48, 90-11 or Terrorist attack of September 11

    • Request for copy of return

    • Arbitrage Rebate Claims

    • TEB AMRH Transcripts

  3. If a case is referred to TEB CPM, annotate in detail on the routing slip or Form 3210 why the case is being referred.

21.7.7.5.4.1  (01-01-2012)
TEB ACCOUNTS MAINTENANCE TRANSCRIPTS
(Credit/Debit Module Balance Listing)

  1. In January 2006, the TEB Credit/Debit Module Balance Listing was converted to AMRH transcripts. The transcripts replace the credit/debit listing that is accessible on Control D. They are formatted the same as existing AMRH transcripts and referred to as:

    • AM 31 — Tax Exempt Bond Credit Balance

    • AM 32 — Tax Exempt Bond Debit Balance

  2. In the upper right corner of the printed transcript, the first printed line on the transcripts will be either of the following:

    • TRANSCRIPT TYPE AMRH 31

    • TRANSCRIPT TYPE AMRH 32

  3. If the transcript is a "Follow-up" or a "Multiple" , the letter "F" or "M" will be printed to the right of the AMRH 31 or 32. See below:

    • TRANSCRIPT TYPE AMRH 31F

    • TRANSCRIPT TYPE AMRH 32F

    • TRANSCRIPT TYPE AMRH 31M

    • TRANSCRIPT TYPE AMRH 32 M

    • TRANSCRIPT TYPE AMRH 31FM

    • TRANSCRIPT TYPE AMRH 32FM

  4. A transcript generates six weeks after the first cycle in which the tax module has a credit or debit balance. Follow-up transcripts will be issued every six months (26 cycles) thereafter as long as the tax module still meets the established criteria.

  5. Form 8038-T is normally the only TEB return that should be received with remittance. The remittance is identified as a green rocker money amount and processed to the MF as a TC 610.

  6. A transcript will generate for each Form 8038 series module that is in either a credit or debit balance. The following information is recorded on the AMRH transcript.

    • Transaction date

    • EIN, MFT, & Tax Period

    • Report Number

    • TC 150 DLN

    • Module balance

    A "*" shown under the "Last Month" column indicates the module was recorded on the prior month listing.

  7. The AM 31 and AM 32 transcripts are routed to OAMC, EO Accounts units for resolution.

  8. Refer to the procedures outlined below for resolving TEB AM Credit/Debit Transcripts. See IRM 21.7.7.5.4.5, for additional information.

21.7.7.5.4.1.1  (01-01-2012)
AM 31 Transcript Procedures
(TEB Credit Module Balances)

  1. Refer to the procedures outlined below to resolve an AM 31 - TEB Credit Balances module. In order to determine the correct liability amount (TC 150), the original return must be reviewed. This can be accomplished by either securing the original return from Files (if necessary) or viewing a copy of the return by accessing the Document Identification Number (DIN) system.

    1. Verify the green rocker amount shown on the return matches the TC 610 payment posted to MF.

    2. To determine the correct TC 150 amount, review the following lines on Form 8038-T to verify they add up to the green rocker amount shown on the return. Refer to the conversion chart shown below to determine which lines are applicable to the various Form 8038-T revision dates. When added together, all lines should total the green rocker remittance amount on the return. TC 150 amount shown on:

      Line 27 for 2002
      Line 23 for 2005 and subsequent

      If Form 8038-T Revision is Then Add Total Should Equal
      TC 150 Amount on
      2002 Lines 16, 17, 18, 19, 23, 24, 25 or 26 Line 27
      2005 and subsequent Lines 13, 14, 15, 17, 19, 21 and 22 Line 23

    3. Adjust the TC 150 amount (if applicable) by inputting a TC 290 increase via CC REQ 54 for the appropriate amount and applicable HC (3 or 4).

    4. If the overpayment belongs to a different report number, tax period or EIN, transfer the payment to the correct account, using CC ADD/ADC 24. Do not correspond with the Issuer.

  2. If the TC 150 amount is zero and the available credit amount (TC 610) matches any of the following fields as displayed on TXMODA, an adjustment may be entered without securing the original return. The TXMODA print showing the applicable fields and TC 610 payment must be used as the Source Document (SD). See Figure 21.7.7-5.

    • REBATE-AMT

    • PNLTY-FTP-T-AMT

    • PNLTY-INT-REB-AMT

    • YLD-REDUCTION-AMT

    • INT-UNDPYMT-AMT

    Reminder:

    All related fields must match exactly.

  3. If the credit module balance cannot be resolved using the procedures outlined in paragraphs (1) or (2) or a credit balance remains after the above steps have been taken, refer to the table below:

    AM 31 Credit Module Balance
    If And Then
    The account is in a credit status Basic IDRS research determines where the payment should be transferred 1. Transfer the payment to the applicable module using CC ADD/ADC 24 (if posted to the MF) or Form 2424.
    2. Do not send correspondence to Issuer.
    Additional credit application cannot be determined through basic IDRS research 1. Initiate telephone contact to taxpayer. Two attempts must be made during regular business hours. Document results on case history sheet.
    2. If unable to contact by phone after two attempts, send a letter to the Issuer explaining account status. Print a copy of letter for the case file. Suspend case for 45 days (30 day response time).
    3. If Issuer responds to the letter with additional information, follow their instructions.
    4. If no reply to the correspondence, complete Form 8758 and transfer remaining credit to Excess Collections (XSF -6800 Account).
    5. Attach copies of letters and case history sheet to the original return.

  4. If the Issuer states they have overpaid the account by submitting duplicate payments and request the excess credit be refunded, instruct the Issuer to complete Form 8038–R.

  5. If the credit balance is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , do not correspond with the Issuer. Transfer the excess credit to the 6800 Account (XSF).

    Figure 21.7.7-5
    This image is too large to be displayed in the current screen. Please click the link to view the image.

    TXMODA PRINT


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