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Post-Issuance Compliance Requirements for Tax-Exempt Bonds

April 02, 2012

Michelle Y. Hatch, CPA
Principal
BlumShapiro

Many tax-exempt organizations have raised money for capital and other improvements through the issuance of tax-exempt bonds.  This type of financing requires additional compliance and reporting.  In recent correspondence from the IRS, issuers are being asked about their bonds as well as their internal policies to ensure post-issuance compliance.

The post-issuance rules generally fall into two basic categories:

  • Qualified use of proceeds and financed property requirements
  • Arbitrage yield restriction and rebate requirements

Under the qualified use of proceeds and financed property requirements, qualified 501(c)(3) bonds would lose their tax exempt status if, at any time, either:

  • The ownership test is not satisfied (i.e. property is not owned by a 501(c)(3) organization or government entity)
  • Both the private business use and payment tests are satisfied
    • Private business use test – more than 5% of the net proceeds of the 501(c)(3) bond issue is used for any private business use
    • Private payment or security test – more than 5% of the payment of principal or interest on the bond issue is either made or secured (directly or indirectly) by payments or property used or to be used for a private business use

The arbitrage yield restriction and rebate requirements generally relate to when the gross proceeds of an issue are used to acquire investments that earn a yield materially higher than the yield on the bonds of the issue.

On the IRS’s Tax Exempt Bond Community section of their website, the IRS has published the following summary points that should be included in an organization’s written post-issuance compliance procedures:

  • Due diligence review at regular intervals
  • Identification of the official or employee responsible for review
  • Training of the responsible official/employee
  • Retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds)
  • Procedures reasonably expected to timely identify noncompliance
  • Procedures to ensure that the issuer will take steps to timely correct noncompliance

One size does not fit all on these policies and therefore the issuers’ and borrowers’ procedures should be tailored to the specific facts of their bond issues.  Therefore the above list is just a starting point for implementing comprehensive written procedures to ensure post-issuance compliance.

The IRS has also updated procedures for the Tax Exempt Bonds Voluntary Closing Agreement Program (TEB VCAP).  TEB VCAP allows bond issuers to request an agreement that a compliance violation will be disregarded, normally in exchange for a cash payment by the issuer.  The updates also permit a reduced settlement amount when an issuer timely submits a TEB VCAP request following the identification of a violation pursuant to due diligence monitoring processes established in the issuer's written post- issuance compliance procedures.

The IRS also released web based educational resources which provide basic information about post-issuance and voluntary compliance programs to assist issuers with understanding their on-going tax responsibilities and their available options to resolve noncompliance on a timely basis.  These new resources are in the Tax Exempt Bond Community on the IRS.gov website.

There are also publications specific to tax exempt bonds that may help organization understand the requirements and develop their written post-issuance compliance policy.  These include:

Publication 4077- Tax-Exempt Bonds for 501(c)(3) Charitable Organization / Compliance Guide

Publication 4078 - Tax-Exempt Private Activity Bonds / Compliance Guide

Publication 4079 - Tax-Exempt Governmental  Bonds / Compliance Guide

Bond issuers should ensure they are familiar with the IRS rules for post issuance compliance, establish written post-issuance compliance procedures that cover at a minimum the points noted above and visit the IRS TEB website for additional resources to assist in your ongoing compliance efforts.

Michelle Y. Hatch, CPA, is a Principal with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in West Hartford and Shelton, CT and Rockland, MA.  The firm serves as business advisors for today’s leading companies, non-profit organizations and government entities, working to strategically tailor and consistently deliver tested solutions for unlocking an organization’s full potential. For more information about BlumShapiro, visit blumshapiro.com.

 

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