Post-Issuance Compliance Procedures

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Post-Issuance Compliance Procedures

• Johnny Hutchinson

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Post-Issuance Compliance Hot Topics

• 4 Topics
• Post-Issuance Compliance Procedures
• Soft Contacts from the IRS
• Voluntary Closing Agreement Program (VCAP)
• IRS Audits

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Post-Issuance Compliance Hot Topics

• Key Points
• 1. 501(c)(3) issuers should monitor Schedule K
  filings and what goes in them.
• 2. Look out for increasing use of soft contacts
  by IRS, including online-only.
• 3. Involve bond counsel or at least tax counsel
  in any submission to the IRS.
• 4. In VCAP and audits, the biggest danger is
  delay and its attendant expense. Avoid delay with
  submissions that are clear and concise. Explain
  all issues and do not raise unnecessary ones.
  Lead the agent down the middle of the road.
• 5. Draft all transaction documents, particularly
  tax documents, with an audit in mind they are
  the road map.

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Post-Issuance Compliance Hot Topics

• Topic 1 Post-Issuance Compliance Procedures

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Post-Issuance Compliance Hot Topics

• Why isnt the tax certificate enough?
• What are the benefits?
• The issuer can check the boxes on the 8038.
•  
• Soft contacts might ask about this. They might
  also ask when the issuer adopted the procedures.
• Lenience in VCAP. 
• IDRs and Questionnaires now routinely ask about
  them.

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Post-Issuance Compliance Hot Topics

• Special problems for conduit issuers. 
• Who has to have the procedures? 
• Who is responsible for monitoring? 
• Creating post-issuance compliance procedures. 
• Most bond counsel now provide as a matter of
  course.
• Resources are available on the web. Available at
  http//www.irs.gov/Tax-Exempt-Bonds/Conduit-Borrow
  ers.

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Post-Issuance Compliance Hot Topics

• Key Points on Post-Issuance Compliance Procedures
• Credibility
• Any time the IRS asks you a question about
  something else, theyll ask about procedures, too.

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Post-Issuance Compliance Hot Topics

• Topic 2 Soft Contacts from the IRS

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Post-Issuance Compliance Hot Topics

• Types.
• Webinars and other information sessions.
• Teleconference on June 7, 2012 regarding the
  examination process.
• Webinar on September 18, 2012.
• Informational Letters and Website Articles.
• IRS has just created a Compliance Practice
  Research Team focused on identifying red flags
  for what they consider to be abusive
  transactions. The IRS has said in public
  conferences that the point of this program is to
  identify for public officials what underwriters
  and others might be trying to push on them.
• Financial Resources Restructuring Team reaching
  out to issuers that are in default.

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Post-Issuance Compliance Hot Topics

• Compliance check questionnaires.
• IRS recently announced that they plan on doing
  one of these per year. Unclear what the focus
  will be.
• In the past it has been quite broad
  governmental bonds or 501(c)(3) bonds. This
  year, it was somewhat more focused QSCBs.
• 2013 Governmental Use Bonds and 501(c)(3) Bonds
  questionnaire about post-issuance compliance
  procedures

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Post-Issuance Compliance Hot Topics

• Types of Soft Contacts.
• Schedule K to Form 990
• This should be a big concern for conduit issuers.
  The borrower is reporting directly to the IRS
  information about the bond issue that you will be
  responsible for dealing with if audited (even if
  the deal documents ultimately transfer the
  obligation to the borrower). TEB personnel at the
  IRS told us at conferences that they are
  reviewing Schedule Ks with their brethren in the
  IRS Exempt Organization personnel and that they
  are reviewing them side by side with the 8038 to
  make sure that they reconcile. Yikes.
• IRS has told us at conferences that they review
  Schedule Ks in groups by types of facilities
  the example they used was 501(c)(3) museums.

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Post-Issuance Compliance Hot Topics

• Tips for handling. 
• Always respond if theres something to respond
  to.
•  
• Dont respond without at least talking to bond
  counsel these things are as much an art as they
  are a science.

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Post-Issuance Compliance Hot Topics

• Key Points on Soft Contacts
• Expect more and more soft contacts from the
  IRS.
• The IRS understands the power of even the softest
  contact.
• Understand the potential exposure from Schedule
  K, where applicable.
• Soft contacts provide important clues about what
  the IRS will focus on in audits.

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Post-Issuance Compliance Hot Topics

• Topic 3 VCAP

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Post-Issuance Compliance Hot Topics

• The IRS had the following primary objectives in
  establishing the VCAP program.  
• Encourage due diligence in complying with the tax
  requirements and to provide a vehicle to correct
  violations of those requirements as expeditiously
  as possible.  
• The Internal Revenue Manual instructs the IRS to
  provide more favorable terms to issuers that come
  through VCAP than those that are caught on audit.
  
• Key point VCAP is a negotiation like a
  settlement conference in litigation.
• Issuer has leverage because it came in on its own
  volition.

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Post-Issuance Compliance Hot Topics

• When is VCAP not available? 
• Theres a more informal relief process. 
• Remedial action regulations. 
• Other published guidance.
• The Bonds have already been caught.
• Examination. 
• Court proceeding. 
• Appeals. 
• IRS determines that the violation was due to
  willful neglect.
• The IRS determines that there hasnt yet been a
  violation.

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Post-Issuance Compliance Hot Topics

• The point of VCAP is to get a closing agreement
  to resolve the issues that have been raised.  
• Generally cant be reopened as to matters agreed
  upon or be modified by the IRS it closes the
  issue. 
• Generally IRS wont reopen the issue in audit.
• Absent extraordinary circumstances, bonds will
  not be selected for audit while they are under
  review in VCAP.  
• Processing the Closing Agreement.
• Assigned to a reviewer.
• Reviewer decides whether to accept the issuers
  opening offer and makes a recommendation to the
  closing agreement committee.  

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Post-Issuance Compliance Hot Topics

• Topic 4 Audits

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Post-Issuance Compliance Hot Topics

• The Services goal with audits is to establish
  an exam presence across the municipal bond
  market.

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Post-Issuance Compliance Hot Topics

• Why did I get audited?
• Random audits. 
• Initiatives employees do reconnaisance
  managers review the results and set priorities.
  This is usually described by the IRS, workplan.
  The FY2012 workplan is available online.
  (http//www.irs.gov/pub/irs-tege/fy_2012_teb_workp
  lan.pdf).
• Referrals from other federal agencies,
  informants, news articles, or internal IRS
  sources.
• Opening letter usually will tell you why.

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Post-Issuance Compliance Hot Topics

• Initial IDR.
• Transcript and documents relating to refunding
  bonds, if any.
• Depending on the extent of the pre-audit review
  of the bonds, more targeted document requests and
  questions may also be raised.
• Electronic responses are preferred.
• Response to the Initial IDR is a key moment in
  the audit.

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Post-Issuance Compliance Hot Topics

• Selection of Counsel and Power of Attorney.
• Experienced counsel should be engaged at this
  initial stage to assist in responding to the
  initial IDR.
• Avoid raising additional questions or concerns in
  the mind of the IRS agent, which can easily occur
  through the misunderstanding of a technical IDR
  question or the use of imprecise language in
  responding to the IDR.
• Bond counsel usually makes the most sense, but
  conflict waiver will be required.

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Post-Issuance Compliance Hot Topics

• Continuation of Audit - Additional IDRs.  
• Can be a frustrating process.  
• The IDRs are often separated in time by months,
  with no communication from the agent between
  IDRs. It is often impossible to determine from
  the IDRs whether the agent believes any
  noncompliance has occurred, what that
  noncompliance might be and whether the agent has
  any particular strategy for uncovering
  noncompliance.  

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Post-Issuance Compliance Hot Topics

• On-site visit. 
• An on-site visit is often required by the agent,
  both to review records that cannot practicably be
  delivered to the agent and to enable the agent to
  observe the bond-financed facilities.
• On-site visits are a good opportunity to make
  significant progress in the audit.
• Audit End-point
• No-change letter.
• No-change letter with finger-wagging.
• Closing Agreement.

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Bonus Round Existential Threats

• Proposals to eliminate
• Obama 28 cap
• Eliminate entirely Camp proposal
• Something in between no PABs
• Likely Vehicle
• Sequestration?
• Continuing Resolution?
• Debt Ceiling?
• Tax reform to lower income tax rates?
• Tax reform to raise revenue?

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Key Points

• Key Point 1
• Monitor Schedule K in 501(c)(3) issues.

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Key Points

• Key Point 2
• Look for increased soft contacts.

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Key Points

• Key Point 3
• Involve counsel.

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Key Points

• Key Point 4
• Delay is the biggest enemy in VCAP and audit.
  Lack of clarity is the biggest cause of delay.

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Key Points

• Key Point 5
• Draft deal documents with VCAP/audit in mind.