How to survive an IRS project audit!
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• Why is the IRS auditing our Bonds? The
IRS wants to ensure that the federal
subsidy provided by the interest
exclusion on bonds is properly applied.
• What is my experience? We (URFA) have
completed 2 audits in the past 2 years.
We expect this to be an annual
occurrence.
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What are the major stages of
an IRS Tax-Exempt Bond Audit?
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Selection of a Bond Issue for Audit
Notification to Issuer
Information Gathering
Receipt of No Change letter.
Did the Agent request a TAM (Technical Advice
Memorandum)?
• Preliminary Adverse Determination
• Settlement? Appeal to IRS Office of Appeals?
• Final Adverse Determination/Conclusion of Audit
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What is the typical “selection
process” for a TEB Bond Audit?
• IRS random audit
• Review of returns filed by issuer or returns of
issuances involving conduit borrowers
• Referrals from other federal agencies or internal IRS
sources
• Information items prepared by IRS revenue agents
for follow-up action
• Pickup of cases related to a current examination or
expansion of a claim into a field examination
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Key points to be aware of during
the “Notification to the Issuer”
process.
• The examining agent is required to notify the issuer
of the specific tax-exempt bond issue under audit
• In most cases the reason for the audit is also
identified
• Throughout the initial stages of the audit and up
through the determination of taxability, the issuer of
the tax-exempt bonds is treated as the “taxpayer,”
even though, technically, the issuer will not be the
party subject to the taxation in the event the bonds
are deemed taxable.
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The “Information Gathering”
stage
• The initial contact letter from the IRS will contain an
Information Document Request (IDR).
• The IRS normally requires a complete response to
the information document request within 30 days or
less of its letter.
• As the audit proceeds, the IRS may send additional
IDRs to the issuer and other parties.
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Typical information requested
by the IRS
• Final copy of the Bond Transcript
• Information related to the redemption or refinancing
of the Bonds
• Arbitrage rebate computations
• Trustee Statements for all funds related to the Bond
Indenture
• Form 8038
• Yield reduction payment computations and yield
restriction analysis
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Important points in the initial
IRS Letter
• The reason for the audit: “We have selected the Multi-family Bond issue
named above for examination. At this time, we have no reason to believe
that your bond issue fails to comply with any of the applicable federal tax
requirements.”
• “This correspondence examination is intended to assess the overall
compliance risk of the bond issue. At this time, we are only requesting
general informational responses, and are not requesting any supporting
documentation. However, we reserve the right to expand this
examination. Moreover, failure to timely respond may result in an
expansion of this examination, including a request for supporting
documentation.”
• Complete enclosed form 4564, Information Document Request.
• Due date was 21 days from date of the letter.
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URFA completed 2 Audits:
How do they compare?
• The first audit initially asked 29 questions followed by 8
additional questions. The timetable was as follows:
– Initial Letter: 09/24/2009
– Second Request for Information: 01/26/2010
– Receipt of “ No change” letter: 11/05/2010
• The second audit contained 46 questions followed by 4
additional questions. The timetable was as follows:
– Initial Letter: 05/15/2011
– Second Request for information: 03/20/2012
– No final resolution as of today
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Sample audit questions
Capitol Gateway Apts. Phase I
Specific topics from initial IRS Letter.
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General Information (6 questions)
Occupancy(16 questions)
Low Income Housing Tax Credits (3 questions)
Non-Residential Uses (2 questions)
Proceeds of the Bonds (16 questions)
Record Retention and Post-Issuance Compliance
Procedures (3 questions).
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Retain Expert Legal Assistance
This is a High Priority!
• Stakes are high!!
• Assure that matters are presented properly to the
IRS
• IRS may ask you to waive certain rights
• Privilege and other rights are easily waived by
mistake
• There could be a conflict having the bond counsel
firm that rendered the bond opinion represent the
issuer before the IRS
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Sample Initial Audit Letter
Capitol Gateway Apts Phase I
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Sample Signature Page/Penalty of Perjury
Capitol Gateway Apts. Phase I
Please Read!!
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Sample IRS 2nd Request Letter
Capitol Gateway Apts Phase I
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Sample IRS 2nd Request
Capitol Gateway
Information Document Request (IDR)
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Response letter to 2nd request
Capitol Gateway Apts Phase I
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Unanswered Questions
• What is the requirement for Public Disclosure?
• What if you do not have the requested information?
• How soon will a negative decision impact
bondholders? What is the statue of limitations?
• Does the IRS offer a long-term repayment plan?
• What is a TAM? Technical Advice Memorandum
• What is the Voluntary Compliance Agreement
Program? Can only be completed prior to the
initiation of the actual audit.
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