Post-Issuance Compliance for Tax-Exempt Bonds Intro and Basics

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1 Post-Issuance Compliance for Tax-Exempt Bonds Intro and Basics

2 DISCUSSION OUTLINE I. Post-Issuance Compliance Overview II. Elements of an Effective Post-Issuance Compliance Program III. Written Policies and Procedures 22

3 POST-ISSUANCE COMPLIANCE OVERVIEW Post-issuance tax compliance begins with the debt issuance and requires a continuing focus on investment of bond proceeds and use of bondfinanced property. After the Bonds Are Issued Then What? Advisory Committee on Tax-Exempt and Governmental Entities 33

4 POST-ISSUANCE COMPLIANCE OVERVIEW Requirements at closing of bond transaction Tax Form filings 8038/8038-G Reasonable expectations regarding use of property Requirements relating to ongoing monitoring after the issuance of the bonds Arbitrage yield restriction and rebate Requires monitoring over the life of the bonds to determine whether yield on invested bond proceeds are properly restricted Requires calculation of arbitrage investment earnings periodically at least every 5 years and payment of arbitrage rebate to the IRS Qualified use of proceeds and bond financed property Requires monitoring the various direct and indirect uses of bond financed property over the life of the bonds Requires calculations of the percentage of nonqualified use (private business use) Annual Schedule K filing with the IRS for 501(c)(3) entities 44

5 POST-ISSUANCE COMPLIANCE OVERVIEW IRS Focus on Post-Issuance Tax Matters: Audits Questionnaires Schedule K Questions on other IRS Forms (8038, etc.) ACT Reports Training and ongoing education VCAP 55

6 POST-ISSUANCE COMPLIANCE OVERVIEW IRS Focus on Post-Issuance Tax Matters The typical tax-exempt bond issue is outstanding for years Issuers and conduit borrowers must comply with federal tax rules for the life of the original bonds and any refunding bonds Foot faults and errors occur easily, borrowers may lack requisite records and detailed information to rebuff IRS in an audit challenging the tax-exempt status of bonds Issuers and conduit borrowers may intentionally act to cause tax law violations Commonly, tax problems discovered at the time of a refunding 66

7 POST-ISSUANCE COMPLIANCE OVERVIEW Why should organizations care about the IRS post-issuance compliance initiative? Failure to comply with the federal tax requirements may jeopardize the preferential tax status of those bonds Defending tax-exempt status of bonds in an IRS audit is expensive, stressful, and time consuming Financial settlement to protect bondholders can be costly Tax problem may delay or derail refunding transaction; cures can be expensive 77

8 POST-ISSUANCE COMPLIANCE OVERVIEW Elements of an Effective Post-Issuance Compliance Program 1. Designation of tax compliance point person(s) 2. Continuing education and training for individuals responsible for postissuance compliance 3. Monitoring the investment income and arbitrage compliance restriction 4. Tracking and allocating the expenditure of bond proceeds 5. Monitoring the use of bond financed property 88

9 POST-ISSUANCE COMPLIANCE OVERVIEW Elements of an effective Post-Issuance Compliance Program 6. Periodic review of management contracts, other facility use agreements, and research contracts by experts in tax matters 7. Recordkeeping and retention policies and procedures 8. Periodic compliance reviews/ongoing communication with outside tax specialists 9. Written policy and procedures relating to post-issuance compliance 10. Addressing changes in use of bond financed property through self-help remediation and VCAP 99

10 WRITTEN POLICIES AND PROCEDURES Evolution of IRS Written Policy Inquiry Compliance Check Questionnaire to 501(c)(3) organizations do you have written policies? (August 2007) Questionnaire to Governmental issuers do you have written policies? When implemented? (Jan 2009) IRS Form Schedule K IRS Form 8038-B new issuance of BABs (Rev Jan 2010) IRS Form 8038-TC new issuance of Tax Credit Bonds (Rev June 2010) IRS Form 8038 new issuance of Private Activity Bonds (Rev April 2011) IRS Form 8038-G new issuance of Governmental Bonds (Rev Sept 2011) Schedule K specifically asks about written procedures in 3 separate instances 10 10

11 WRITTEN POLICIES AND PROCEDURES What should be included in a Written Post-Issuance Tax Compliance Policy? Designation of post-issuance tax compliance point person(s) Tax-exempt bond tax law compliance requirements including: Documentation External counsel/advisors Investments/role of trustee Arbitrage and yield restriction Private use of bond proceeds Identification and correction of violations Expenditures Final allocations 11 11

12 WRITTEN POLICIES AND PROCEDURES What should be included in a Written Post-Issuance Tax Compliance Policy? Record keeping requirements Annual review and training Frequency of internal compliance checks Potential remedial action options Important to review annually and update as necessary 12 12

13 WRITTEN POLICIES AND PROCEDURES What is the Purpose/Benefit of a Written Post-Issuance Tax Compliance Policy? Allows you to report on IRS information returns that you have adopted written policies and procedures Demonstrates to the IRS that you are taking your post-issuance compliance responsibilities seriously Assigns responsibility for certain tasks and responsibilities to specific individuals or departments Identify and resolve noncompliance in a timely manner Memorializes processes and activities to aid in the event of staff turnover 13 13

14 IDENTIFICATION AND CORRECTION OF TAX VIOLATIONS Various self-help remedies are available in the event of violations relating to: Excess private business use of bond financed property Sale of bond financed property 14 14

15 IDENTIFICATION AND CORRECTION OF TAX VIOLATIONS Self-help actions include: Defeasance of a portion of the bonds related to excess private use Bonds retired within 90 days of action; or If bonds cannot be retired, fund a defeasance escrow within 90 days of the action In an all cash sale of bond-financed property, seller can use the sale proceeds of the bond-financed property for another qualified purpose within 2 years of the date of the sale Timing is key!! If undertaking any of the above, get legal advice in advance of any such action 15 15

16 IDENTIFICATION AND CORRECTION OF TAX VIOLATIONS IRS Voluntary Closing Agreement Program ( VCAP ) When self-help is not available Process involves confessing sins to the IRS Model template filing process must be followed IRS will require a monetary settlement At the end of the process, the issuer and the IRS will enter into a confidential closing agreement 16 16

BENEFITS OF AN EFFECTIVE POST-ISSUANCE COMPLIANCE PROGRAM Good risk management Generate efficient and prompt response to any IRS inquiry Easy and

17 BENEFITS OF AN EFFECTIVE POST-ISSUANCE COMPLIANCE PROGRAM Good risk management Generate efficient and prompt response to any IRS inquiry Easy and cost-effective review process at time of refunding Identify remaining portion of bond proceeds allowed for private use Ease in completion of Schedule K 17 17

POST ISSUANCE COMPLIANCE UPDATE

POST ISSUANCE COMPLIANCE UPDATE Alan Bond Managing Director abond@blxgroup.com (212) 506-5275 Erik Dingwall Managing Director edingwall@blxgroup.com (813) 872-6840 Post-Issuance Tax Compliance Training