RECOVERY
ACT
The Direct Pay Build America Bond Compliance Check Program Has Yet to Result in Wide-Scale Examinations
June 3, 2011
Reference Number: 2011-11-053
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Email Address | TIGTACommunications@tigta.treas.gov
Web Site |
http://www.tigta.gov
HIGHLIGHTS
THE DIRECT PAY BUILD AMERICA BOND
COMPLIANCE CHECK PROGRAM HAS YET TO RESULT IN WIDE-SCALE EXAMINATIONS
Highlights
Final
Report issued on June 3, 2011
Highlights of Reference Number:
2011-11-053 to the Internal Revenue Service Acting Commissioner for the
Tax Exempt and Government Entities Division.
IMPACT ON TAXPAYERS
In February 2010, the
Tax Exempt Bonds (TEB) office mailed 375 compliance check questionnaires to
issuers of Build America Bonds, which resulted in concerns from the bond
industry that responses could result in wide-scale examinations and potential
loss of a Federal subsidy. TIGTA
determined the initiation and scope of compliance checks were appropriate and,
as of the end of our fieldwork, very few Build America Bond examinations had
been initiated, contrary to bond industry fears. However, written procedures for developing and
conducting compliance checks had not been established. Procedures would provide added assurance that
the TEB office does not exceed its authority when executing future
compliance check programs and could ease concerns within the bond community by
improving the transparency of future compliance checks.
WHY TIGTA DID THE AUDIT
The overall objectives
of this review were to evaluate the TEB office’s use of compliance checks to
identify indications of a high risk of noncompliance for Build America Bonds
and to evaluate the TEB office’s plans to address the high-risk
indicators.
WHAT
TIGTA FOUND
The
compliance check questionnaires issued by the TEB office were appropriate for
identifying indications of a high risk of potential noncompliance for Build
America Bonds and did not request information specific enough to start
examinations. In fact, as of the end of our
fieldwork, very few Build America Bond examinations had been initiated,
contrary to bond industry fears. According
to TEB office management, these examinations were started based on research and
reviews of requests for subsidy payments, rather than responses to compliance
check questionnaires.
While the TEB office questionnaires were appropriate
for gathering information for use in developing a longer term compliance
strategy, the TEB office does not have formal written procedures for developing
and conducting compliance checks. Procedures would be
beneficial to help TEB office employees develop future compliance check
programs, provide added assurance the IRS does not exceed its authority when
executing such programs, and ease concerns by improving transparency so the
bond community will have a better understanding of the compliance check
process.
In
addition, TIGTA could not evaluate the TEB office’s plans to address
high-risk indicators because the TEB office has yet to complete an in-depth
review of the compliance check questionnaire responses and develop a longer
term compliance plan.
WHAT TIGTA RECOMMENDED
TIGTA recommended that
the Director, TEB, Tax Exempt and Government Entities Division, document formal
guidelines for planning and conducting compliance check programs.
In their response to
the report, IRS management agreed with the recommendation. The TEB office plans to publish new
procedures on 1) the roles and responsibilities of TEB office managers and
employees assigned to the program, 2) the planning process for developing
questionnaire projects, 3) documenting the approval for questionnaire projects,
4) the process for evaluating collected data, and, 5) the decision points for
proceeding with follow-up compliance efforts, including examinations when
appropriate.
June 3, 2011
MEMORANDUM FOR ACTING COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: (for) Michael R. Phillips /s/ Nancy A. Nakamura
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – The Direct Pay Build America Bond Compliance Check Program Has Yet to Result in Wide-Scale Examinations (Audit # 201010111)
This report presents
the results of our review of the Internal Revenue Service’s use of the Build
America Bond Compliance Check Program under the American Recovery and
Reinvestment Act of 2009 (Recovery Act).[1] The
overall objectives of this review were to evaluate the Tax Exempt Bonds
office’s use of compliance checks to identify indications of a high risk of
noncompliance for Build America Bonds and to evaluate the Tax Exempt Bonds office’s
plans to address the high-risk indicators. This review was conducted as part of our
Fiscal Year 2011 Annual Audit Plan and addresses the major management challenge
of Tax Compliance Initiatives.
The Recovery Act provides
separate funding to the Treasury Inspector General for Tax Administration
through September 30, 2013, to be used in oversight activities of Internal Revenue
Service programs. This audit was
conducted using Recovery Act funds.
Management’s
complete response to the draft report is included as Appendix VII.
Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendation. Please contact me at (202) 622-6510 if you have questions or Nancy A. Nakamura, Assistant Inspector General for Audit (Management Services and Exempt Organizations), at (202) 622-8500.
Appendices
Appendix
I – Detailed Objectives, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Direct Pay Bonds Compliance Check Questionnaire
Appendix VII –
Management’s Response to the Draft Report
Abbreviations
|
BAB |
Build America Bond |
|
EMMA |
Electronic Municipal Market Access |
|
IRS |
Internal Revenue Service |
|
TEB |
Tax Exempt Bonds |
The American Recovery and Reinvestment Act of 2009 (Recovery
Act)[2]
was enacted on February 17, 2009, and created one specific type of bond known
as a Build America Bond (BAB). Between April 2009 and December 2010, more
than $181 billion of BABs were issued by 49 States, the District of
Columbia, and 2 United States territories.
BABs were created in response to the unprecedented challenge that State and local governments encountered accessing the credit markets during Calendar Year 2008. During that time, banks and other financial institutions suffered significant investment losses and reduced their involvement in tax-exempt municipal bonds. As a result, State and local governments could not easily obtain funding for capital projects such as construction of highways, bridges, or schools. The BAB program expired on December 31, 2010; however, legislation has been proposed to reintroduce BABs with slightly different program requirements.
Bond
investors (bondholders) earn interest income on their BAB investment, which is
paid by the State or local government that issued the bonds. Unlike tax-exempt bonds, BAB bondholders must
claim this interest income on their tax returns for the bond interest payments. BABs can be issued with a direct pay or a tax
credit option.
· Direct Payment Option – Under the direct payment option, the Department of the Treasury pays either the bond issuer or a designated third party 35 or 45 percent of the interest payable to bond investors. This partially offsets the State and local governments’ cost of paying bond interest.
·
Tax Credit Option
– Under the tax credit
option, bondholders receive a tax credit to be applied against their Federal
income tax liability equal to generally 35 or 45 percent of the bond coupon
interest.
BABs
have unique rules when compared to traditional tax-exempt bonds, including that
the issue price of bonds can be only a minor or insignificant amount over the
stated principal amount of the bonds. For
Direct Pay BABs, these rules include 1) a requirement that bond revenue be used
for capital improvements (e.g., construction of airports, hospitals,
recreational and cultural facilities, schools, and water infrastructure) and
not for operating capital (e.g., funds used for day-to-day operation of the
entity such as paying salaries), and 2) the issuer is required to make an
irrevocable election and timely file a correctly completed Return for Credit Payments
to Issuers of Qualified Bonds (Form 8038-CP)
in order to receive the credit payment from the Federal Government over the life of the bond instead of having bondholders
claim a tax credit on their individual tax returns.
Upon passage of the
Recovery Act, the Department of the Treasury directed the Internal Revenue
Service (IRS) to assess the risk associated with Recovery Act bonds, including
BABs, and to develop a plan to address risks that were identified. Tax Exempt Bonds (TEB) office management, within
the Tax Exempt and Government Entities Division, identified information
reporting requirements, refundable credit payments, and payments claimed from
nonqualified bonds as the potential risks associated with Recovery Act
bonds. The TEB office determined that
because of the unique requirements of BABs, issuers may not understand or
ensure that compliance requirements are met.
Based on this risk, the TEB office developed a compliance check program
to gather information on bond issuer understanding of the requirements so TEB office
management could better understand and identify remedies for customer issues
and reduce the need for future enforcement actions, such as examinations.
The TEB office developed
a Direct Pay Bonds Compliance Check Program, and in February 2010, it mailed 375
compliance check questionnaires[3] to all issuers of Direct Pay BABs issued from
February through September 2009. Compliance
checks serve a different purpose and are not the same, legally, as examinations.
·
Compliance checks are voluntary for IRS customers and provide the TEB office a method of
gathering information to better understand customer needs and to identify
appropriate remedies for compliance issues. Although bond issuers are not required to
participate in compliance checks, they are an important part of the TEB office’s
strategy to reduce the need for enforcement by keeping abreast of trends
emerging in the tax‑exempt and tax credit bond sector. Specifically, compliance checks evaluate post‑issuance
and record retention policies, procedures, and practices of the bond issuers, but
do not include a review of books and records to determine an entity’s liability
for taxes.
In Fiscal Year 2010, news articles appeared that expressed bond
issuer concerns about the Direct Pay Bonds Compliance Check Program.
The audit was initiated because of bond issuer concerns that appeared in the news media in the spring of Fiscal Year 2010 about whether responding to the compliance checks would result in wide-scale future examinations. Issuers were concerned that responding inappropriately to compliance check questions about issue price could lead to examinations and eventual loss of the Federal subsidy. In the past, very limited information was available to the IRS on the sales price of municipal bonds; however, beginning in June 2009, trading information, including pricing, was required to be publicly available on the Electronic Municipal Market Access (EMMA).[4] Due to the Recovery Act requirement of transparency on certain bond transactions, a spotlight was put on the issue of how bond prices are set.
This is our fourth audit
of Recovery Act bond provisions. See
Appendix V for a synopsis of the prior three
audits.
This review was
performed at the Tax Exempt and Government Entities Division TEB Headquarters
Office in Washington, D.C., and the TEB Compliance and Program Management
office located in St. Louis, Missouri, during the period August 2010 through January 2011.
We conducted this performance audit in
accordance with generally accepted government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained
provides a reasonable basis for our findings and conclusions based on our audit
objectives. Detailed information on our
audit objectives, scope, and methodology is presented in Appendix I. Major contributors to the report are listed
in Appendix II.
The compliance check questionnaires issued by the TEB office were appropriate for identifying indications of a high risk of potential noncompliance for BABs. However, we could not evaluate the TEB office’s plans to address high-risk indicators because the TEB office has yet to complete a detailed review of the compliance check questionnaire responses and develop a longer term compliance plan.
Based on our analysis of the compliance check questionnaire, we believe the questions were appropriate because they were designed to elicit responses that could indicate a high risk of potential noncompliance without requesting information specific enough to start examinations. In fact, as of the end of our fieldwork, very few BAB examinations had been initiated, contrary to bond industry fears. According to TEB office management, these examinations were started based on research and reviews of requests for subsidy payments, rather than responses to compliance check questionnaires.
While the TEB office questionnaires were appropriate for gathering information for use in developing a longer term compliance strategy, the TEB office does not have formal written procedures for developing and conducting compliance checks. Procedures would be beneficial to help TEB office employees develop future compliance check programs, provide added assurance the IRS does not exceed its authority when executing such programs, and ease concerns by improving transparency so the bond community will have a better understanding of the compliance check process.
The Initiation and Scope of the Build America Bonds Compliance Checks Were Appropriate; However, Plans to Identify and Address Potential High-Risk Indicators Have Not Been Developed
Our review determined that the manner in which the compliance check program was initiated and the scope of the questions mailed to bond issuers were appropriate. Specifically:
At the time of our audit, TEB office management had not performed a detailed review of the 220 issuer responses to the compliance check questionnaires because they were waiting to determine if additional responses would be received. Although TEB office management has not performed a detailed review, our review and analysis of the 220 compliance check responses from bond issuers identified indicators of a high risk of potential noncompliance based on answers to the issues covered on the questionnaire. See Appendix VI for our analysis.
TEB office management stated they plan to conduct additional
detailed analysis of compliance check responses, along with a review of
information such as data from the Master File,[5]
Municipal Securities Rulemaking Board,[6] the EMMA, Statistics of Income Distributed
Processing Image Net,[7] and Returns Inventory and Classification System,[8] to identify indications of a high risk of potential
noncompliance. If indicators of
potential noncompliance are identified, the TEB office can address the
potential risk through programs that are already in place, such as the
Education and Outreach Program, the Voluntary Closing Agreement Program, or the
Examination Program.
At the time of our audit, the TEB office had opened several examinations of BABs. The potential risk indicators that eventually resulted in the opening of examinations were identified from research and reviews of requests for subsidy payments, rather than responses to compliance check questionnaires. TEB office management stressed that compliance check responses alone would never provide an indication of potential noncompliance strong enough to result in examinations. However, until this understanding is strengthened through implementation of formal guidelines for planning and conducting compliance check programs, TEB office management will not have assurance that their compliance check programs will comply with the Internal Revenue Code or that useful information will be gathered to ensure indicators of potential noncompliance are identified, evaluated, and appropriately addressed.
The Tax Exempt Bonds Office Does Not Have Documented Guidelines for Developing and Initiating Compliance Check Programs
The Standards for Internal Control in the Federal
Government requires that internal
controls need to be clearly documented in management directives, administrative
policies, or operating manuals. However,
TEB office internal guidelines do not include formal written procedures for
developing and conducting compliance checks.
Therefore, the TEB office did not document a formal plan for development
and execution of the Direct Pay Compliance Check program. Instead, the program was based on the “Risk
Assessment and Impact Analysis” process required by the Department of the
Treasury to document risks, plans of action, and expected completion dates of
tasks for addressing risks for the Recovery Act bonds. In addition, the questionnaire was patterned
after a prior TEB office compliance check program that did not include a formal
plan and a compliance check program from another IRS office that did
include a formal plan.
The TEB office had not developed guidance because of time pressures to begin assessing the risks associated with BABs. Without documented guidance for future projects, TEB office employees may not develop and initiate compliance check programs that are within their statutory authority, or gather information that is useful for assessing risk. In addition, increased burden could be created for bond issuers by requesting information that is unnecessary, and information gathered may not be useful if results are not properly anticipated and plans developed to evaluate indicators for measuring potential noncompliance. Without adequately designed and useful compliance programs, the TEB office may not have an understanding of the potential sources of risk in order to be able to address potential noncompliance, if needed. Also, documenting compliance check procedures could reduce concerns, such as those expressed in the news media, by increasing awareness so the bond community will have a better understanding of the compliance check process.
Recommendation
Recommendation 1: The Director, TEB, Tax Exempt and Government Entities Division, should document formal guidelines for planning and conducting compliance check programs. These guidelines should include, but not be limited to:
Management’s
Response: Tax Exempt and Government Entities Division management
agreed with this recommendation and will publish guidelines for the TEB office
compliance check program. This guidance
will include: 1) the roles and
responsibilities of TEB office managers and employees assigned to the program,
2) the planning process for developing questionnaire projects, 3) documenting
the approval for questionnaire projects, 4) the process for evaluating
collected data, and 5) the decision points for proceeding with follow-up
compliance efforts, including examinations when appropriate.
Appendix I
Detailed Objectives, Scope, and Methodology
Our overall objectives were to evaluate the TEB office’s use of compliance checks to identify indications of a high risk of noncompliance for BABs and to evaluate the TEB office’s plans to address the high-risk indicators. To accomplish this, we:
I. Evaluated the controls over the development of compliance check questionnaires to assess the risk of BAB noncompliance.
A. Determined whether the TEB office developed a written plan documenting its objective and methodology of how the risk assessment would be conducted.
B. Compared the risk assessment plan to the Internal Revenue Manual and determined whether the questions exceeded IRS written procedures for assessing the risk of noncompliance prior to opening examinations.
C. Evaluated the compliance check questions and determined whether all questions were in line with the goals and purpose of the risk assessment as documented in the risk assessment plan or other documentation.
II. Determined whether controls ensured the TEB office would make appropriate use of the compliance check results.
A. Analyzed the compliance check questions and a judgmental sample of issuer responses to identify the types and purpose of information requested by the questionnaire. A judgmental sample of 30 issuer responses from a population of 220 responses was selected and reviewed. Judgmental sampling techniques were used to validate the accuracy and completeness of the data captured from the questionnaires and were not used to project the results across the population.
B. Determined how responses to compliance check questions would be evaluated and identified the potential use of the information.
III. Based on the results of the analyses performed by the TEB office, determined what subsequent actions were planned to address indicators of potential noncompliance.
Internal controls methodology
Internal controls
relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal
controls include the processes and procedures for planning, organizing,
directing, and controlling program operations.
They include the systems for measuring, reporting, and monitoring
program performance. We determined the
following internal controls were relevant to our audit objectives: the Internal Revenue Code, IRS publications
and letters defining compliance checks, and the compliance check questionnaire. We evaluated these controls by interviewing
management, reviewing the questionnaires, reviewing responses to the
questionnaires, and reviewing other applicable documentation.
Appendix II
Major Contributors to This Report
Nancy A. Nakamura, Assistant Inspector
General for Audit (Management Services and Exempt Organizations)
Troy D. Paterson, Director
Gerald T. Hawkins, Audit Manager
Andrew J. Burns, Lead Auditor
Yolanda D. Brown, Auditor
Carol A. Rowland, Auditor
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Director, Government Entities, Tax Exempt and Government Entities Division SE:T:GE
Director, Tax Exempt Bonds, Tax Exempt and Government Entities Division SE:T:GE:TEB
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaison: Director, Communications and Liaison, Tax Exempt and Government Entities Division SE:T:CL
Appendix IV
Direct Pay Bonds Compliance Check Questionnaire
|
Form 14127 2071 (January 2010) |
Department
of the Treasury — Internal Revenue Service Direct Pay Bonds Compliance Check
Questionnaire |
OMB No. 1545 |
We are asking for
information regarding your Direct Pay Bonds, post-issuance bond compliance and
record retention practices. Direct Pay Bonds referred to in this questionnaire
are Build America Bonds described in section 54AA(g)
of the Internal Revenue Code. Please complete the questionnaire and follow the
instructions in the accompanying letter for returning it to us. Please note
that section references in this questionnaire are to sections of the Internal
Revenue Code unless otherwise indicated. For all accompanying documentation,
please clearly label the question to which it relates.
Name of Governmental
Entity:_______________________________________________
Employer
Identification Number:______________________________________________
|
1. Do you have
written procedures to ensure that none of the maturities of your Direct Pay
Bonds are issued with more than a de minimis amount
of premium as required by section 54AA(d)(2)(C)? |
Yes |
No |
|
|
If Yes, date they
were implemented? __________________(dd/mm/yyyy) |
|
|
|
|
If Yes, describe in
detail your procedures for ensuring compliance with such de minimis rule and how you implement such procedures,
including dates of revisions, if any. In lieu of the above description, you
may attach a copy of your written procedures. If you have no written
procedures, explain what guidelines you have in place and from what source
these guidelines are derived that ensure Direct Pay Bonds issued with premium
fall within the de minimis rule. (Attach sheet with description) |
|
|
|
|
2. Are records of
secondary market trading activity for your Direct Pay Bonds available through
the Municipal Securities Rulemaking Board's Electronic Municipal Market
Access System (see http://www.emma.msrb.org)? Municipal Market
Access System (see http://www.emma.msrb.org)? |
Yes |
No |
Do
not know |
|
If Yes, did you or
a consultant to the issuer, other than the underwriter or initial purchaser
of the Direct Pay Bonds, review the records of the secondary market trading
activity for the Direct Pay Bonds after the sale date of the bonds but
trading activity for the Direct Pay Bonds after the sale date of the bonds
but before the bonds were delivered on the date of issue? |
YYes |
No |
Do
not know |
|
If Yes, that is, if
such records were reviewed as described above, did any of your Direct Pay
Bonds trade at a price greater than the issue price prior to the the issue price prior to the delivery of those Direct Pay
Bonds on the date of issue? the date of issue? |
Yes |
No |
Do
not know |
Catalog Number 54588D www.irs.gov
Form 14127
(Rev.
01-2010)
Page
2 of 4
|
3. Do you have written
procedures to ensure that your Direct Pay Bonds remain in compliance with the
following Federal tax requirements after the bonds are issued: |
|
|
|
a. Timely
expenditure of bond proceeds? |
Yes |
No |
|
If Yes, date they
were implemented? ______________________(dd/mm/yyyy) |
|
|
|
b. Correct
calculation of Available Project Proceeds (See
section 54A(e)(4))? |
Yes |
No |
|
If Yes, date they
were implemented? ______________________(dd/mm/yyyy) |
|
|
|
c. Use of 100% of
Available Project Proceeds less amount in a reasonably required reserve fund
only for capital expenditures (See
section 54AA(g)(2)(A))? |
Yes |
No |
|
If Yes, date they
were implemented? ______________(dd/mm/yyyy) |
|
|
|
d. Arbitrage yield
restriction and rebate? |
Yes |
No |
|
If Yes, date they
were implemented? ______________(dd/mm/yyyy) |
|
|
|
e. Costs of
issuance financed by the issue do not exceed 2% of the proceeds of sale (See section 54A(e)(4)(A)(ii))? |
Yes |
No |
|
If Yes, date they
were implemented? ______________(dd/mm/yyyy) |
|
|
|
f. Proper
determination of the amount of interest payable on each interest payment
date? |
Yes |
No |
|
If Yes, date they
were implemented?________________(dd/mm/yyyy) |
|
|
|
g. Proper amount of
refundable credit reported on Form 8038-CP? |
Yes |
No |
|
If Yes, date they
were implemented? ________________(dd/mm/yyyy) |
|
|
|
h. Timely filing of
Form 8038-CP? |
Yes |
No |
|
If Yes, date they
were implemented? _________________(dd/mm/yyyy) |
|
|
|
i. Payment of
refundable credit will be made to the proper person? |
Yes |
No |
|
If Yes, date they
were implemented? _________________(dd/mm/yyyy) |
|
|
|
If Yes, describe in
detail your procedures for each of the above items (a-i) and how you
implement such procedures, including dates of revisions, if any. In lieu of
the above descriptions, you may attach a copy of your written procedures. If
you have no written procedures, explain what guidelines you have in place and
from what source these guidelines are derived that ensure bond financings are
in compliance with Federal tax requirements. (Attach sheet with description) |
|
|
Catalog Number 54588D www.irs.gov
Form 14127
(Rev.
01-2010)
Page
3 of 4
|
4. Do you have
written procedures to ensure timely identification of violations of Federal
tax requirements after your Direct Pay Bonds are issued and the timely
correction of any identified violation(s) through remedial actions described
in the Treasury Regulations or through the Tax Exempt Bonds Voluntary Closing
Agreement Program described under Notice 2008-31? |
Yes |
No |
|
If Yes, date they
were implemented? ________________(dd/mm/yyyy) |
|
|
|
If Yes, describe in
detail your procedures for timely identification and correction of any such
violations and how you implement such procedures, including dates of
revisions, if any. In lieu of the above description, you may attach a copy of
your written procedures. If you have no written procedures, explain what
guidelines you have in place and from what source these guidelines are
derived that ensure timely identification and correction of any violations of
Federal tax requirements. (Attach
sheet with description) |
|
|
|
5. Do you maintain
records necessary to support the status of the bonds as qualified to receive
the tax advantaged treatment described in section54AA(g)? |
Yes |
No |
|
If yes, for how
long? |
|
|
|
|
|
|
6. How do you maintain
your bond records? |
|
|
|
|
|
Catalog Number 54588D www.irs.gov
Form 14127
(Rev.
01-2010)
Page
4 of 4
|
|
|
|
|
Under penalties of
perjury, I declare that I have examined this completed questionnaire,
including accompanying documents and statements, and to the best of my
knowledge and belief, the completed questionnaire contains all the relevant
facts relating to the answers to the questionnaire, and such facts are true,
correct, and complete. |
|
|
|
Signature: ________________________________ |
Date: |
________ |
|
Printed Name:______________________________ |
|
|
|
Title:________________________________________ |
|
|
Privacy Act and Paperwork Reduction Act
Notice. We ask for the information on this form to
carry out the Internal Revenue laws of the United States. We need it to ensure
that you are complying with these laws.
The IRS may not
conduct or sponsor, and an organization is not required to provide the
information requested on a form that is subject to the Paperwork Reduction Act
unless the form displays a valid OMB number. Books or records relating to a
collection of information must be retained as long as their contents may become
material in the administration of any Internal Revenue law. Generally, tax
returns and tax return information are confidential, as required by 26 U.S.C.
6103 and 6104.
Catalog Number 54588D www.irs.gov Form 14127
(Rev.
01-2010)
Appendix V
Previous Audit Coverage of Bond Provisions in the American
Recovery and Reinvestment Act of 2009[9]
|
Title |
Results |
|
Observations About Annual Dollar Limits for American
Recovery and Reinvestment Act of 2009 Bonds (Reference Number 2010-11-016, dated January 8, 2010) |
The American Recovery and Reinvestment Act of 2009 (Recovery
Act) authorizes State and local governments to issue more than $45 billion
in new bonds, some with volume caps on the dollar amounts that can be issued.
The
TEB office will need to be vigilant to ensure that Recovery Act bonds are not
issued in excess of annual limits. If
annual limits are exceeded, the Federal Government risks losing future tax
revenue because excess Recovery Act bonds may not be eligible for tax credits
or may be taxable. The TEB office
believes it has taken steps to ensure it is adequately monitoring the volumes
of Recovery Act bonds. |
|
Initial Published Guidance for American Recovery and
Reinvestment Act of 2009 Bonds Was Complete, Accurate, and Consistent (Reference Number 2010-11-035, dated March 16,
2010) |
The Recovery Act
authorizes new and expanded bond financing subsidies. The initial guidance published by the IRS
in the form of notices was complete, accurate, and consistent with the
tax-exempt and tax credit bond requirements of the Recovery Act. The notices were issued quickly to help
bond issuers understand how to issue tax-exempt and tax credit bonds intended
to stimulate the economy by preserving and creating jobs. |
|
Initial Build America Bond Subsidy Payments |
The Recovery Act
created a new type of bond, known as BABs, for which the Federal Government
will partially offset the State and local governments’ cost of paying bond
interest. Generally, all complete
requests for payment of the BAB Federal subsidies were processed accurately,
timely, and without indications of fraudulent or erroneous disbursement. |
Appendix VI
Analysis of 220 Bond Issuer Responses to the
Direct Pay Bonds Compliance Check Questionnaires
|
Compliance Check Question |
TIGTA Analysis of Issuer
Responses |
|
Do you have written
procedures to ensure that none of the maturities of your Direct Pay Bonds are
issued with more than a de minimis amount of premium as required by Internal
Revenue Code Section 54AA (d)(2)(C)? |
Sixty-seven percent of
the issuers indicated they have written procedures to ensure compliance with Internal
Revenue Code Section 54AA (d)(2)(C). Written procedures are
not a requirement; however, they are important in assisting the bond issuers with
monitoring the bond throughout its life to assure compliance. If bonds fall out of compliance, the
potential exists that the BAB status of the bond could be revoked and issuers
may not continue to receive the subsidy from the Federal Government. For example, if a school board issued BABs
without formal written procedures, future employees of the board may not
understand what is needed to ensure compliance with the Internal Revenue
Code. Therefore, the bond could lose
its status as a BAB and the Federal Government could discontinue the Federal
subsidy that partially offsets the State and local governments’ cost of
paying bond interest. We believe the absence
of written procedures is an indicator of potential noncompliance. |
|
Are records of
secondary market trading activity for your Direct Pay Bonds available through
the Municipal Securities Rulemaking Board’s Electronic Municipal Market
Access System (EMMA)? |
Seventy percent of
issuers indicated records of secondary market trading activity are available
on the EMMA. Access to secondary
market trading activity provides bond investors key
information needed when investing in municipal securities, allows the bond
issuers to monitor the bonds’ trading prices to verify information provided
by the underwriters, and allows the bond counsel to ensure there is no change
to their tax opinion. If secondary
market trading activity is not available in a centralized location, municipal
market participants will not have easy access to the most recent sales
information. We believe not entering
secondary market trading activity on the EMMA when required is an indicator
of potential noncompliance. |
|
Do you have written
procedures to ensure that your Direct Pay Bonds remain in compliance with Federal
tax requirements after the bonds are issued? |
Seventy-six percent of issuers indicated written procedures are
maintained to ensure bonds remain in compliance with the Federal tax
requirements. If the Federal
requirements are not met, the bonds may no longer qualify
as BABs and, therefore, could potentially lose the Federal subsidy payment of
35 or 45 percent of the interest payable to bond investors. We believe that not
documenting procedures to ensure bonds remain in compliance with the Internal
Revenue Code after bonds are issued is an indicator of potential
noncompliance. |
|
Do you have written
procedures to ensure timely identification of violations of Federal tax
requirements after your Direct Pay Bonds are issued and the timely correction
of any identified violation(s) through remedial actions described in the
Treasury Regulations or through the Tax Exempt Bonds Voluntary Closing
Agreement Program described under |
Fifty-nine percent of
issuers indicated written procedures are maintained to ensure timely
identification of violations of Federal tax requirements after bond
issuance. Written procedures are
important to prevent bond issuers jeopardizing the bond status. If the Federal requirements are not met, or
noncompliance is not identified and corrected, the bonds may no longer qualify
as BABs and, therefore, could potentially lose the Federal subsidy payment of
35 or 45 percent of the interest payable to bond investors. We believe that not
documenting procedures to ensure timely identification of violations of
Federal tax requirements after bonds are issued is an indicator of potential
noncompliance. |
|
Do you maintain records
necessary to support the status of the bonds as qualified to receive the tax
advantaged treatment described in Internal Revenue Code Section 54AA (g)? |
Ninety-nine percent of issuers indicated records are
maintained to support the status of the bonds qualified to receive the tax
advantaged treatment under Internal Revenue Code Section 54AA (g). It is important to
maintain documentation for the sale of the bond to support the BAB status to
ensure continued receipt of the Federal subsidy payment of 35 or 45 percent
of the interest payable to bond investors. We believe not
maintaining appropriate documentation to support the tax advantaged treatment
described in Internal Revenue Code Section 54AA (g) would be an indicator of
potential noncompliance. |
|
How do you maintain
your bond records? |
All issuers indicated
bond records are maintained on paper or electronic media. It is important to
maintain documentation for the sale of the bond to support the BAB status and
ensure continued receipt of the Federal subsidy payment of 35 or 45 percent
of the interest payable to bond investors.
We believe not
maintaining appropriate documentation in either paper or electronic
media to support the tax advantaged treatment described in Internal
Revenue Code Section 54AA (g) would be an indicator of potential
noncompliance. |
Appendix VII
Management’s Response to the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL
REVENUE SERVICE
WASHINGTON,
D.C. 20224
COMMISSIONER
TAX
EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
MAY 13 2011
MEMORANDUM FOR DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Joseph H. Grant /s/ Joseph H. Grant
Acting Commissioner, Tax Exempt&
Government Entities
SUBJECT: The Direct Pay Build
America Bond Compliance Check Program Has Yet To Result In Wide-Scale
Examinations (Audit #201010111)
I am pleased to respond to your report evaluating the Tax Exempt
and Government Entities Division's use of compliance check questionnaires as
part of its compliance strategy for addressing risks related to build America
bonds. This performance audit was initiated to determine whether the questions
used in the build America bonds questionnaire project were appropriate for
identifying indications of a high risk of potential noncompliance.
We appreciate your finding that the questions included in the
questionnaire were appropriately designed to elicit responses that could
indicate a high risk of potential noncompliance without requesting information
specific enough to start an actual examination of a bond issue. In particular,
we agree that general questions relating to an issuer's specific processes and
procedures for monitoring post-issuance tax compliance and ensuring the
retention of adequate records to substantiate such compliance are directly
relevant in assessing the potential noncompliance of that issuer's bond issues.
These questions have been and will continue to be an integral part of our
compliance check questionnaires for bonds.
We also agree with your finding
that general questions relating to how an issuer reviews the pricing and
secondary market trading activity of its bonds in evaluating the accuracy of
pricing information provided by the underwriter are appropriate in identifying
high risk of potential noncompliance relating to the mispricing of bonds. Such
noncompliance could relate to violations of the arbitrage requirements, volume
cap limitations, and the de minimis premium
limitation applicable to build America bonds. As you stated in your report, a
review of secondary market trading activity allows bond counsel to ensure there
is no change to their tax opinion with respect to the pricing of bonds.
Finally, we agree that written procedures for planning and
implementing compliance check questionnaire projects would help ensure both the
program's operational effectiveness and its transparency to taxpayers. As you
noted in your report, we have implemented three bond-related questionnaire
projects to date relating to qualified 501(c)(3)
bonds, governmental bonds, and build America bonds. While each of these
projects were developed and implemented following formal administrative guidelines
prepared by TE/GE for projects relating to exempt organizations, we agree that
TE/GE should publish new procedures for planning and implementing bond-related
questionnaire projects. We accept your recommendation to publish such
guidelines for the TEB compliance
check program. We agree that they would further our goal of providing quality
programs and service to TE/GE taxpayers.
Our response to your proposed corrective action is on the
attachment. If you have any questions, please contact Clifford Gannett, Acting
Director, Government Entities, at 202-283-9820 or Robert Henn,
Acting Director, Tax-Exempt Bonds, at 718-488-2014.
Attachment
Attachment
Recommendation 1
The Director, TEB,
should document formal guidelines for planning and conducting compliance check
programs. These guidelines should include, but not be limited to:
•
Documenting
the purpose, goals, anticipation of results, how the results will be collected
and evaluated, and decision points for proceeding to examinations. These
guidelines should ensure that the scope and execution of compliance checks are
within the statutory authority of the TEB office.
•
Requiring
a review and approval process to include the basis for proceeding with the
compliance check program.
•
Including
an explanation of the responsibilities of team members.
Corrective Action
TEB will publish new procedures under section 4.81 of the Internal
Revenue Manual providing administrative guidelines for the TEB compliance check
program. These procedures will include guidance on: 1) the roles and
responsibilities of TEB managers and employees assigned to the program; 2) the
planning process for developing questionnaire projects; 3) documenting the
approval for questionnaire projects; 4) the process for evaluating collected data;
and 5) the decision points for proceeding with follow-up compliance efforts
including examinations when appropriate.
Implementation Date
March 30, 2012
Responsible Official
Robert Henn,
Acting Director, Tax Exempt Bonds
[1] Pub. L. No. 111-5, 123 Stat. 115 (2009).
[2] Pub. L. No 111-5, 123 Stat. 115 (2009).
[3] See Appendix IV for a copy of the Direct Pay Bonds Compliance Check Questionnaire.
[4] The EMMA web site allows investors to view municipal bond trading trends to better understand market activity. The EMMA provides snapshots of daily trade data based on municipal bond characteristics such as trade type, size, sector, maturity, source of repayment, and type of coupon.
[5] The IRS database that stores various types of taxpayer account information. This database includes individual, business, and employee plans and exempt organizations data.
[6] A regulating body that creates rules and policies for investment firms and banks in the issuance and sale of municipal bonds, notes, and other municipal securities by States, cities, and counties.
[7] A Statistics of Income Division computer system that includes databases, applications, and scanned returns to support the IRS’s requirement to report to Congress annually on the numbers and types of returns filed, the characteristics of those returns, and the money amounts reported on those returns.
[8] The Tax Exempt and Government Entities Division’s computer system that provides access to filing, processing, and posting of returns.
[9] Pub. L. No 111-5, 123 Stat. 115 (2009).