The Internal Revenue Service, Tax Exempt & Government Entities Division, has released its Fiscal Year 2019 Program Letter, a copy of which is available here. Among other things, the Program Letter identifies the compliance areas for the tax-exempt bond community that will be a priority for the IRS in the new fiscal year which began on October 1.

Based on the Program Letter, issuers should expect to see heightened interest from the Service in the following areas, likely leading to a higher volume of audits focused on these topics:

  • Compliance with the 2% limit on use of bond proceeds to pay cost of issuance of tax-exempt private activity bonds under Section 147(g) of the Code
  • Compliance with the remediation action regulations under Treasury Regulation Sections 1.141-12 and 1.142-2, particularly the requirement that the issuer provide notice to the IRS within 90 days of the establishment of a defeasance escrow
  • Compliance with the private business use rules in Section 141 of the Code in the context of management contracts involving public safety bonds

For issuers that have identified compliance issues involving these topics, now may be a good time to consider the Voluntary Closing Agreement Program (VCAP), which affords issuers the opportunity to voluntarily disclose and resolve violations of the federal tax rules applicable to tax-exempt bonds. Information about the program can be found here.

Under VCAP, qualifying issuers that disclose violations of the tax rules may obtain standardized settlements for certain common violations, including violations of the types identified above. Generally speaking, the issuer must submit its VCAP application within one year of the occurrence of the violation (six months to obtain the most lenient treatment). An issuer that successfully qualifies for VCAP should receive a settlement on more favorable terms than if the violation was ignored and later discovered in an audit.

As was the case in previous fiscal years, the Service will continue its prioritization of audit examinations that arise from referrals (both external and internal referral sources). And, the Service will continue its focus on using data modeling to better analyze tax-exempt bond information returns (forms 8038 and 8038-G) and test for noncompliance.