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1 How to survive an IRS project audit!. The IRS wants to ensure that the federal subsidy provided by the interest exclusion on bonds is properly applied.

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Presentation on theme: "1 How to survive an IRS project audit!. The IRS wants to ensure that the federal subsidy provided by the interest exclusion on bonds is properly applied."— Presentation transcript:

1 1 How to survive an IRS project audit!

2 The IRS wants to ensure that the federal subsidy provided by the interest exclusion on bonds is properly applied Why is the IRS auditing our Bonds? The IRS wants to ensure that the federal subsidy provided by the interest exclusion on bonds is properly applied. What is my experience? We (URFA) have completed 2 audits in the past 2 years. We expect this to be an annual occurrence. 2

3 What are the major stages of an IRS Tax-Exempt Bond Audit? Selection of a Bond Issue for Audit Notification to Issuer Information Gathering Receipt of No Change letter. Did the Agent request a TAM (Technical Advice Memorandum)? Preliminary Adverse Determination Settlement? Appeal to IRS Office of Appeals? Final Adverse Determination/Conclusion of Audit 3

4 What is the typical “selection process” for a TEB Bond Audit? IRS random audit IRS random audit Review of returns filed by issuer or returns of issuances involving conduit borrowers Referrals from other federal agencies or internal IRS sources Information items prepared by IRS revenue agents for follow-up action Pickup of cases related to a current examination or expansion of a claim into a field examination 4

5 Key points to be aware of during the “Notification to the Issuer” process. The examining agent is required to notify the issuer of the specific tax-exempt bond issue under audit In most cases the reason for the audit is also identified Throughout the initial stages of the audit and up through the determination of taxability, the issuer of the tax-exempt bonds is treated as the “taxpayer,” even though, technically, the issuer will not be the party subject to the taxation in the event the bonds are deemed taxable. 5

6 The “Information Gathering” stage The initial contact letter from the IRS will contain an Information Document Request (IDR). The IRS normally requires a complete response to the information document request within 30 days or less of its letter. As the audit proceeds, the IRS may send additional IDRs to the issuer and other parties. 6

7 Typical information requested by the IRS Final copy of the Bond Transcript Information related to the redemption or refinancing of the Bonds Arbitrage rebate computations Trustee Statements for all funds related to the Bond Indenture Form 8038 Yield reduction payment computations and yield restriction analysis 7

8 Important points in the initial IRS Letter The reason for the audit: “We have selected the Multi-family Bond issue named above for examination. At this time, we have no reason to believe that your bond issue fails to comply with any of the applicable federal tax requirements.” “This correspondence examination is intended to assess the overall compliance risk of the bond issue. At this time, we are only requesting general informational responses, and are not requesting any supporting documentation. However, we reserve the right to expand this examination. Moreover, failure to timely respond may result in an expansion of this examination, including a request for supporting documentation.” Complete enclosed form 4564, Information Document Request. Due date was 21 days from date of the letter. 8

9 URFA completed 2 Audits: How do they compare? The first audit initially asked 29 questions followed by 8 additional questions. The timetable was as follows: – Initial Letter: 09/24/2009 – Second Request for Information: 01/26/2010 – Receipt of “ No change” letter: 11/05/2010 The second audit contained 46 questions followed by 4 additional questions. The timetable was as follows: – Initial Letter: 05/15/2011 – Second Request for information: 03/20/2012 – No final resolution as of today 9

10 Sample audit questions Capitol Gateway Apts. Phase I Specific topics from initial IRS Letter. General Information (6 questions) Occupancy(16 questions) Low Income Housing Tax Credits (3 questions) Non-Residential Uses (2 questions) Proceeds of the Bonds (16 questions) Record Retention and Post-Issuance Compliance Procedures (3 questions). 10

11 Retain Expert Legal Assistance This is a High Priority! Stakes are high!! Assure that matters are presented properly to the IRS IRS may ask you to waive certain rights Privilege and other rights are easily waived by mistake There could be a conflict having the bond counsel firm that rendered the bond opinion represent the issuer before the IRS 11

12 Sample Initial Audit Letter Capitol Gateway Apts Phase I 12

13 Sample Signature Page/Penalty of Perjury Capitol Gateway Apts. Phase I Please Read!! 13

14 Sample IRS 2 nd Request Letter Capitol Gateway Apts Phase I 14

15 Sample IRS 2 nd Request Capitol Gateway Information Document Request (IDR) 15

16 Response letter to 2 nd request Capitol Gateway Apts Phase I 16

17 Unanswered Questions What is the requirement for Public Disclosure? What if you do not have the requested information? How soon will a negative decision impact bondholders? What is the statue of limitations? Does the IRS offer a long-term repayment plan? Technical Advice Memorandum What is a TAM? Technical Advice Memorandum Can only be completed prior to the initiation of the actual audit What is the Voluntary Compliance Agreement Program? Can only be completed prior to the initiation of the actual audit. 17


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