Advisory Committee on Tax Exempt and Government Entities (ACT ...

The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common ViolationsIn light of this relatively short predicted processing period, the policy and legal concernsdescribed above, and the belief that issuers and conduit borrowers would prefer writtenconfirmation from the IRS, the ACT decided not to propose a self-executing feature.The ACT now believes that the program described above can be operated in an efficientand timely manner and will ensure that an SCAP agreement, like the existing VCAP, willhave the statutorily-based finality of a closing agreement covered by Section 7121 ofthe Code.An IRS determination to decline an SCAP proposal would not preclude the applicantfrom refiling under SCAP with a revised Compliance Certificate. The IRS should statein its notice of rejection any specific deficiencies which prevented approval, in order tofacilitate a successful refiling. A short form, perhaps with boxes to be checked, could beused for this purpose.A notice declining to accept an SCAP proposal also should specifically state that theapplicant is encouraged to submit a proposal under the traditional VCAP program.Finally, a notice declining to accept an SCAP proposal should state that a refiling underSCAP or under the traditional VCAP program within a specified time period will relateback to the original filing date for purposes of avoiding the harsher treatment applicableto violations identified by audit.Fees/PenaltiesWhile a list of potential Covered Violations is appended to this report, the ACT has notattempted to propose specific terms or closing agreement amounts. The ACT suggeststhat such terms and amounts be established with the goal of encouraging the maximumpossible voluntary correction of unintended tax law violations. “Taxpayer exposure,”defined in IRM 4.81.1.23 as “…the amount of tax the Service could collect ifbondholders paid tax on the interest they have earned and will earn on the bonds,”which is a measure used in settling certain audit disputes, should not be the startingpoint for or a standard of comparison applied for this purpose. Amounts to be paidmight be better thought of as fees rather than as penalties. The ACT believes that,notwithstanding SCAP’s streamlining of the closing agreement process and theavailability of more moderate payments, issuers and conduit borrowers will still haveoverwhelming incentives to achieve full compliance at the outset. The time investmentnecessary even for application for SCAP relief, together with the awkwardness ofadmitting to a violation of the law, in almost all cases will prevent SCAP from being adisincentive to original compliance.ImplementationThe ACT recognizes that introduction of a new program requires a determination as tothe appropriate procedural vehicle for its establishment. The choice to utilize a formalRegulation, a Revenue Procedure, a Notice, an amendment to the Internal RevenueADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 8