Office of Tax Exempt Bonds Role of the Internal Revenue Service’s Office of Tax- Exempt Bonds

Office of Tax Exempt Bonds Role of the Internal Revenue Service’s Office of Tax- Exempt Bonds

3 TEB Organization Steve Chamberlin (Acting) Director TEB Allyson BelsomeBob Griffo Program Manager(Acting) Program Field Operations Manager CPM

4 Compliance and Program Management TEB Compliance and Program Management responsibilities: Coordination with Referral Committee Voluntary Closing Agreement Program (VCAP) Outreach Program Updating IRM and other procedures Coordination with Counsel Technical issue development Quality review of closed examination cases Questionnaires and surveys Classification

5 TEB Policy: Resolution of Violations It is the continuing policy of the Service to attempt to resolve violations of the Code at the issuer level without taxing bondholders.

6 Voluntary Closing Agreement Program (VCAP) Purpose: The primary purpose of VCAP is to encourage issuers, conduit borrowers, and other parties to bond transactions to exercise due diligence and to correct any issuance and post-issuance violations of the applicable sections of the Internal Revenue Code. VCAP has been expanded to include tax credit bonds.

7 VCAP Resolution Standards The IRM contains resolution standards for certain identified violations (“Streamlined VCAP”), including: Failure to provide notice of defeasance; Impermissible advance refunding; and Failure to timely reinvest proceeds into 0% SLGS.

8 Questionnaires and Market Segment Surveys Purpose: Gather data regarding the practices and procedures of issuers regarding record keeping and monitoring of the rules applicable to their financings. Allows TEB to monitor compliance trends for the purpose of designing proactive education and outreach products for use by TEB Customers.

9 Classification The process by which returns are selected for examination. Classification attempts to include financings that address: Key areas identified through examinations and compliance check project initiatives; Market segment risk assessment; and Annual Work Plan criteria. Classified returns are either: Examined by CPM staff or Examined by Field Operations

10 Field Operations Examinations are conducted at the issuer level, consistent with the continuing policy to attempt to avoid taxing individual bondholders. Field Operations personnel located throughout the country conduct comprehensive and limited scope examinations, and assist in the delivery of outreach to the bond community.

11 Field Operations TEB Field Operations is responsible for: is primarily responsible for identifying and correcting noncompliance with Federal tax laws applicable to tax- advantaged bonds. The FO office conducts examinations, with fairness and the highest level of integrity, at the issuer level. The goal of the program is to pro-actively assist issuers in their tax-advantaged bond compliance with the Federal tax laws. FO concentrates its efforts on the many emerging issues and focus areas in the tax-advantaged bond community.

12 Examinations As part of TEB’s general program work, the Field: Conducts comprehensive examinations of a wide variety of governmental and private activity bonds Seeks to resolve identified violations through closing agreements.

13 Examinations The primary objective of a TEB examination is to determine if the bond issuance is in compliance with the qualification provisions of the Internal Revenue Code.

14 Examinations In a tax-advantaged bond examination the Issuer of the bonds is considered the “taxpayer,” so the burden of maintaining and producing adequate records necessary to conduct a quality examination is on the Issuer. In the examination of a private activity bond many records are often secured from the Conduit Borrower, and sometimes from other parties to the transaction. However, they are considered third parties in a tax-exempt bond examination.

15 Examinations Under the provisions of IRC section 6103, the Service may contact third parties to obtain information. Generally, contacts with third parties are made when the Service is unable to obtain the information from the issuer or to verify information provided by the issuer. IRC 7602(c) requires the IRS to: Provide advance notice to the taxpayer that third party contacts may be made. Periodically provide a list of all third party contacts to the taxpayer. Provide a list of third party contacts to the taxpayer upon request.

16 Examinations At the inception of the examination, the issuer is notified in writing of the initiation of an examination of an identified financing. The letter may indicate how the return was selected for examination and will detail the required items for the examination. We may, however, request additional items at a later date. The examination may include a comprehensive review of the municipal debt issuance, or focus on specific aspects.

17 Examinations During the course of an examination, TEB seeks to identify and resolve issues as expeditiously as possible Issues may be resolved without the issuance of a formal report, or subsequently thereafter Violations are resolved through a closing agreement with the issuer and may include other parties to the transaction Resolution of violations through closing agreements Includes negotiated terms that typically include payment of a settlement amount and/or redemption of bonds Consider, in part, the due diligence of issuers and their representatives to act in good faith to resolve violations in a timely manner.

18 Examinations Failure to resolve an identified violation through a closing agreement results in: The issuance of a Form 5701 (if not previously issued) A proposed adverse letter Pursuant to the issuance of a proposed adverse letter, the issuer may request the matter to be considered by the Office of Appeals Failure to timely request an appeal will result in the issuance of a final adverse letter pursuant to which the interest on the bonds is includible in the gross income of bondholders (or a credit is not allowable.)

19 Examinations of Advance Refunding Bonds One of the key audit aspects of an advance refunding issue is to determine that the yield on the escrow fund is not more than.001% above the bond yield of the refunding bonds. To ensure such compliance, requested documentation typically includes: The Verification Report, Investment records, and Proof of securities purchased to fund the escrow.

20 Examinations of Advance Refunding Bonds The focus of any advance refunding bond examination is largely driven by the funding of the escrow fund: SLGS, Open Market Securities, or A combination of both (0% rollover SLGS).

21 Examinations of Advance Refunding Bonds SLGS-funded escrows: Focus on verification that the issuer in fact purchased what was depicted in the Verification Report. Escrows with open market securities: Same as above, but with additional consideration to the purchase of the securities at fair market value. Escrows requiring reinvestment into 0% SLGS: Verify the reinvestment occurred timely.

22 Examinations of Advance Refunding Bonds Violations resulting from the failure to reinvest timely in 0% SLGS that result in a yield on the escrow fund that is higher than the yield on the refunding bonds. VCAP offers a standardized resolution for this violation and may be on more favorable terms than a violation identified in an exam.

23 VCAP Resolution Standard For this purpose, proceeds held by the trustee due to this reinvestment failure may be treated as invested at the applicable federal funds rate (AFFR) Trustee certifies that Its customary practice is to invest its overnight balances at a rate which approximates the AFFR the proceeds were likely invested in such a manner Certificate is required even if trustee is not a party to the VCAP

24 Yield Restriction Compliance when SLGS Window is Closed Generally, the proposed Treasury Regulations (into which an issuer may elect) allow an issuer to make a yield reduction payment for investments purchased when the SLGS window is closed.

25 Whistleblower/Fraud/6700 TEB continues to address referrals from the Whistleblower Office and the application of section 6700 penalties and fraud considerations when warranted.

26 Whistleblower In 2006, legislation was enacted establishing the Whistleblower Office such that previously existing Code section 7623 was re- designated as section 7623(a) and a new section (b) provision was added. Primary difference between “a” and “b” is that b claims are those for which the amount of tax due is over $2M and includes “Taint analysis.”

27 Fraud and 6700 In all examinations, consideration is given to the potential for fraud and whether the application of the Code section 6700 penalty is appropriate.

28 Fraud and 6700 Section 6700 is applicable to any person who: organizes or assists in organizing and makes or furnishes (or causes another person to make or furnish) certain statements, including statements regarding exclusion of income and allowability of credits and for which the person knows or had reason to know such statement was false or fraudulent as to any material matter, shall pay a penalty of 50% of the gross income derived from the activity.

29 Fraud and 6700 Fraud involves a willful attempt. Section 6700 is not a fraud penalty. Section 6700 requires that the person knows or should have known that the statements were false or fraudulent. It is not necessary that a determination be made that bonds do not qualify as a tax advantaged bond in order to assert a penalty.

30 Areas of Focus TEB general program work and other project work ensures a broad coverage of compliance matters.

31 Areas of Focus Recent examples of areas of focus include: Abusive Transactions Post Issuance Compliance Arbitrage Governmental and Charitable Financings Direct Pay Bonds

32 Post Issuance Compliance Post Issuance Compliance is an area of focus for TEB in exam, VCAP, Outreach and all other TEB activities.

33 Limited Scope Exams Project initiatives can take the form of a limited scope examination. Limited scope examinations can be expanded to a more comprehensive examination if it is deemed warranted by the examining agent and approved by the Group Manager.

34 Limited Scope Exams Examples of current and future limited scope examinations include: Advance Refundings TRANs/RANs/BANs Small Governmental Issues 8038-T Examinations Solid Waste

35 Customer Satisfaction A new web based customer satisfaction tool is being developed to monitor customer satisfaction on closed TEB examination cases.

36 Department of the Treasury Internal Revenue Service