Office of Audit
BOND PROMOTER MISCONDUCT PROCEDURES SHOULD BE IMPROVED
Final Report issued on March 6, 2020
Highlights of Reference Number: 2020-10-016 to the Commissioner of Internal Revenue.
IMPACT ON TAXPAYERS
U.S. State and local governments finance two‑thirds of all infrastructure projects through the issuance of municipal bonds. The IRS’s Tax Exempt Bonds (TEB) office administers Federal tax laws related to municipal financing and conducts examinations to ensure compliance, including responsibility for considering promoter misconduct under Internal Revenue Code Section 6700. The promoter penalty may be imposed on persons who organize or participate in a bond transaction and make false or fraudulent statements regarding the tax benefit to potential investors.
WHY TIGTA DID THE AUDIT
This audit was initiated to determine whether IRS management has controls in place that provide reasonable assurance that examiners consider whether Internal Revenue Code Section 6700 abusive tax shelter promoter penalties are warranted, or not, when performing tax‑advantaged bond examinations.
WHAT TIGTA FOUND
TIGTA reviewed 127 closed examinations conducted in Fiscal Year 2017 and determined that examiners did not always document whether the promoter penalty was warranted or not. In addition, workpapers were incorrectly completed and quality reviewers did not identify incomplete case documentation.
When the IRS closes an examination with a penalty assessment, it uses penalty reference numbers to indicate the results in its systems; however, the TEB office used only the generic Tax Exempt and Government Entities Division reference number for all assessed penalties and in cases for which they did not assess any penalties. This practice embeds compliance issues into one data attribute and may compromise the reliability of IRS compliance information.
According to IRS data, between Fiscal Years 2009 and 2018, examinations based on referrals have resulted in larger adjustments than examinations from other sources. The average tax adjustment from referrals was $455,533 compared to $159,952 from all other sources. However, the TEB office rarely opened cases from potentially productive sources such as media reports or other Federal agencies, including those sources with oversight responsibilities such as the Securities and Exchange Commission.
WHAT TIGTA RECOMMENDED
TIGTA made five recommendations including that the Commissioner, Tax Exempt and Government Entities Division, update guidance to require examiners to document their consideration of whether promoter penalties are warranted, or not, in every examination. TIGTA also recommended that the IRS ensure that quality reviewers determine examiners’ consideration of promoter penalties; develop a comprehensive training program; and develop a data-driven method to track and quantify specific noncompliance issues. Furthermore, TIGTA recommended that the IRS improve identification of TEB office examination inventory by considering the merits of cases pursued by the Securities and Exchange Commission or those reported by media outlets.
In their response, IRS management agreed with three recommendations and partially agreed with the other two. Management plans to take corrective actions.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number / 202-622-6500
E-mail Address / TIGTACommunications@tigta.treas.gov
Website / https://www.treasury.gov/tigta