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October 20‚ 2011
Schedule K and
Post-Issuance Compliance
By Jeremy A. Spector
Several recent developments have underscored the importance
for Section 501(c)(3) organizations with outstanding tax exempt bonds of
adopting and implementing procedures for monitoring their post-issuance
compliance with federal tax requirements. An IRS examination of outstanding
bonds, however limited, can be costly in terms of lost staff time, related
defense costs and possible reimbursement of lost taxes to the US Treasury
if a compliance violation is identified. Adopting and implementing
monitoring procedures is relatively inexpensive, is strongly recommended by
the IRS, must be reported on the Form 990, and is essential in lowering the
risk of a costly, lengthy audit.
Speaking at a recent conference, Cliff Gannett, Acting
Director of Government Entities and Steven Chamberlin, Manager of the IRS’s
office of Compliance and Program Management, announced plans of the IRS to
commit resources for reviews of the annual filings of Form 990 Schedule K
(Supplemental Information on Tax-Exempt Bonds). This is the second time the
IRS has publicly stated it will actually screen the Form 990 data now
submitted annually by Section 501(c)(3) organizations with outstanding
tax-exempt bonds and possibly initiate targeted audits where warranted.
Schedule K to the Form 990 requires Section 501(c)(3)
organizations to annually provide the IRS detailed information on most
outstanding tax-exempt bond issues concerning the status of expenditure of
bond proceeds, private business use and investments. The IRS plans to use
such submitted information to initiate limited scope enforcement
examinations designed to obtain additional information in problematic areas
to assess whether further complete examinations should be commenced.
Gannett and Chamberlin’s announcement follows on the heels of
an Advanced Refunding Bonds Compliance Check Questionnaire sent out to 269
governmental entities and 31 exempt organizations in May of 2011. The
questionnaire, among other things, inquires whether the borrower has
written procedures to timely identify and correct federal tax compliance
problems. It also asks whether those responsible for monitoring compliance
have been provided training or education.
In a further development, all Forms 8038 (the forms filed by
governmental issuers whenever bonds are issued) now require governmental
issuers to check a box indicating whether they have implemented reasonable
written compliance procedures to periodically monitor use of financed
property and investment of gross proceeds. The IRS believes that those
Borrowers who develop and implement written post issuance compliance
procedures that periodically monitor a bond issue’s tax exempt status are
less likely to run into compliance problems. In addition, early
identification of problems may be inexpensively resolved through the IRS’
voluntary compliance agreement program..
The foregoing developments clearly reflect an effort by the
IRS to persuade both issuers and borrowers to (1) adopt written procedures
to monitor post-issuance compliance and (2) take reasonable steps to
implement them. The forthcoming Schedule K reviews will certainly inform
the IRS whether its efforts in the area are indeed improving compliance.
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