The Internal Revenue Service on Monday announced new compliance priorities for tax-exempt bonds involving student loan bonds and yield restrictions on Form 8038-G for government-issued municipal bonds.
Monday ad arrived midway through fiscal 2021 after just one other priority – arbitration violations – had been announced since the start of Oct. 1 of the federal fiscal year.
The strategy of focusing on student loan obligations will determine whether the requirements of Section 144 (b) of the Internal Revenue Code are met, the IRS said.
“Failure to meet these requirements could result in the imposition of interest on the bonds on bondholders,” the service said. “The processing flow for this strategy is reviews.”
The IRS’s decision to revert to auditing student loans after focusing on this area years ago has been called “interesting” by Christie Martin of Mintz Levin in Boston, chair of the law committee. from the National Association of Bond Lawyers.
Matthias M. Edrich, partner at Kutak Rock in Denver and another member of the NABL tax law committee, also said he was surprised “because this segment has already been audited there is not too much. years ”.
“The yield restriction and discount arbitrage issues that could relate to student loans would likely already be incorporated into the focus on yield restriction and discount arbitrage,” Edrich said. “Does the IRS intend to look at other aspects of student loans now, beyond the rules on arbitration obligations?”
The IRS said its audits of Form 8038-G “will examine yield restrictions on bond proceeds after the statutory temporary period to determine whether the proceeds are limited to the performance of the issue.”
“If the issuer fails to limit the return on investment after the temporary period, the bonds will be considered arbitrage and taxable bonds,” the service said. “In addition, interest paid to bondholders will be taxable.”
Late last year, the IRS said its initial target for fiscal 2021 involved potential arbitration violations of Section 148 of the Internal Tax Code by investing the proceeds of the bonds in investments. with higher yield beyond the temporary period allowed under Treasury Regulation (Treasury Regulation) 1.148-2 (e).
At that time, the IRS said other tax compliance and enforcement priorities involving municipal bonds would be published in quarterly updates on the Tax Exemptions and Entities Division webpage. government – Compliance programs and priorities.
Edrich recalled that he was disappointed last November when the IRS released its program letter for fiscal 2021 with only reference to tax-exempt bonds contained in the accompanying publication on TE’s Strategic Goals. / GE.
“At the time, I remember being disappointed with the lack of detail regarding tax-exempt bonds, compared to program letters from previous years,” he said. “I think it’s helpful that the IRS has now released additional information on its bond review target.”
The IRS also said on Monday that it would continue its IRS enforcement and compliance priorities for fiscal 2020, including public safety and prison obligations, sinking fund overfunding and bonds. at variable rate.
With respect to public safety obligations, the IRS determines whether federal government use and management contracts result in excessive private commercial use that undermines the tax-exempt status of public safety obligations.
The Santa Cruz County, Arizona, Jail District last month filed a public notice that the IRS issued a preliminary ruling that its 2017 tax-exempt refund obligations should be treated as taxable retroactively.
The March 10 IRS letter said the prison’s repayment obligations met the test for private business use and private payments because part of the facility was under contract to house federal prisoners.
Regarding the overfunding of sinking funds, the IRS focuses on whether the overfunding has caused the bonds to be arbitrage bonds, which negatively impacts their qualification as than tax credit bonds.
And for floating rate bonds, the IRS determines whether the issues met the yield reduction and restriction rules under section 148 of the IRC, the bond and investment yields were calculated correctly, and the reimbursement or the yield reduction liability (if any) has been correctly determined.
IRS audits of the fair market value of open market securities determine arbitrage violations under Section 148 of the IRC, particularly with respect to the fair market value requirements for integers from lapse to date. restricted yield under Treasury Regulation 1.148-5 (d) (6).
The Internal Revenue Service’s Tax-Exempt Bonds unit closed about 200 fewer reviews in fiscal 2020 than expected due to the pandemic disruption.
The new exams were suspended between March 2020 and last July due to COVID-19.
As a result, the TEB unit closed almost 300 files instead of reaching its initial target of around 500 files.
The previous goal was cited in a presentation to the National Association of Bond Lawyers more than in 2019, but was not mentioned when the IRS announced its achievements for 2020 earlier this year.
The reviews that TEB has closed involved a combination of “compliance strategies and referrals, complaints and other records,” the IRS said in the February summary released by Edward Killen, acting commissioner of the Tax Exempt & Government Entities group.
The majority of those cases – 170 – involved compliance strategies that “resulted in a written notice to the bond issuer, including issues such as private commercial use and issuance costs,” the February press release.