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

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The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common ViolationsADDITIONAL SPECIAL PROGRAMS During the process of identifying possible Covered Violations, the ACT considered twoother areas of recurring problems which seemed susceptible to the sort of streamlined,less time-consuming, less costly voluntary compliance program being proposed in thisreport. However, because the ACT is not convinced that these violations satisfy therequirements for SCAP, they are discussed separately here, and it is suggested that theIRS consider development of additional streamlined subsets of the VCAP programtailored to these violations.First, some violations are simply too small in dollar magnitude to justify a majorinvestment of resources by the IRS or by the issuer. However, as issuers and conduitborrowers are urged to devote substantially increased attention to monitoring postissuancecompliance, small dollar violations will continue to be identified. Examples ofsuch violations include de minimis excess private use or costs of issuance. Issuers andborrowers should not be faced with a voluntary compliance program which encouragesthem to “run for luck” as to such violations. However, violations of this sort have onlysize in common, not the substance of the violations. If the IRS is not comfortableincluding this sort of violation in a list of SCAP Covered Violations, it should considerimplementation of an alternative streamlined process, with appropriate standards andlimitations, for small dollar violations.A second type of violation considered by the ACT involves inadequate recordkeeping.Based upon discussions with IRS personnel, it does not appear that IRS enforcementactions have directly attacked bond issues based upon inadequate records kept byissuers or conduit borrowers. However, particularly as the IRS develops recordretentionpolicies in response to the 2005 ACT Report, entitled “Tax Exempt Bonds:Record Retention Burden” (June 8, 2005), and comments received in response toNotice 2006-63, 2006-29 I.R.B. 87, issuers and conduit borrowers may wantconfirmation that their records are not an independent source of vulnerability for theirbonds. Again, these sorts of problems are qualitatively different from those describedas SCAP Covered Violations, and may involve substantial factual differences amongapplicants. However, again it seems to the ACT that a streamlined program could becreated as a subset of the existing VCAP program to the great advantage of both theIRS and the bond community. The ACT’s discussions with certain constituency groupsin the bond community indicated strong demand for VCAP in this area, althoughconcern was also expressed that issuers should not be subjected to penalty forparticular deficiencies until formal guidance on recordkeeping is promulgated.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 10
The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common ViolationsRESOURCES As stated above in “Limitations of Existing VCAP,” resources committed to the existingVCAP program have been inadequate to allow prompt processing of applications.While the proposed SCAP is designed to allow many common violations to beprocessed on a streamlined basis, which will allow IRS personnel to focus attention onrequests which require more individualized negotiation, the ACT hopes that theavailability of simplified SCAP procedures will encourage a far greater demand forvoluntary closing agreements. The net result would likely be a significant increase, nota decrease, in personnel needed to administer the program. As noted, the growingfocus by the bond community on post-issuance compliance procedures also can beexpected to produce a significant increase in demand for voluntary closing agreements,under existing VCAP as well as under SCAP.The ACT urges the IRS to allocate substantially more resources to these voluntaryprograms. While the existence of a robust enforcement program is an essentialdisincentive to abusive transactions, the vast size of the State and local bond marketprecludes the use of audits as the principal tool to ensure tax law compliance. TheACT’s 2007 report encouraged issuers and conduit borrowers to develop betterprocedures to monitor post-issuance compliance, which procedures inevitably willincrease the number of identified violations. Adequate procedures for timely voluntaryresolution of such violations is an essential next step. It would be a severedisappointment to the bond community if, having encouraged voluntary efforts to identifytax compliance problems, the IRS were to be incapable of assisting issuers and conduitborrowers to remedy them.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 11
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EXHIBIT D (CONTINUED)18. Descriptio
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Withholding RequirementsACCOUNTING
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