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IRS Increases Examinations of Tax-Exempt Bonds for Educational Institutions

April 09, 2012

Elizabeth A. Solecki, CPA

The Internal Revenue Service has recently increased its examinations of tax-exempt bonds, including those issued by educational institutions in our area. 

These bonds can lose their tax-exempt status if issuers do not take steps to ensure that (1) the original proceeds are spent in compliance with federal tax requirements, and (2) that the bond-financed facilities are used in accordance with federal tax requirements over the life of the bond.  Issues can occur when private business use of bond-financed facilities exceeds certain threshold percentages.  In addition, issuers are subject to ongoing arbitrage requirements, including requirements to make yield reduction or rebate payments if there are excess earnings realized on the investment of bond proceeds. 

The IRS has indicated that the absence of satisfactory compliance procedures will likely increase the penalties that the IRS will impose if it finds any violations.  The IRS had indicated that issuers should adopt written procedures, applicable to all bond issues, which go beyond reliance on tax certificates included in bond documents provided at closing.  The IRS believes that sole reliance on the closing bond documents may result in procedures insufficiently detailed or not incorporated into an issuer's operations.  At a minimum, these procedures should address each of the following:

  • The officials responsible for monitoring compliance;
  • A description of training provided to the officials responsible for monitoring compliance;
  • The frequency of compliance checks, which must be at least annually;
  • The nature of the compliance activities required to be undertaken;
  • The procedures used to timely identify non-compliance;
  • The procedures ensuring that the issuer will take steps to timely correct non-compliance;
  • A demonstration of the awareness of the availability of the Voluntary Closing Agreement Program and other remedial actions to resolve violations; and
  • The procedures for retention of all records that are material for substantiating compliance with the applicable federal tax requirements.

The goal of establishing and following written procedures is to identify and resolve non-compliance on a timely basis and to preserve the preferential status of tax-exempt bonds.  The IRS believes that, in general, an issuer that has established and followed comprehensive written procedures to promote post-issuance compliance is less likely to violate the federal tax requirements related to its bonds.

For more information, please contact Liz Solecki at esolecki@blumshapiro.comor (860) 561-6875.


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