Public Finance

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.


October 20ā 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 IRSís 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 Chamberlinís 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 issueís tax exempt status are less likely to run into compliance problems. In addition, early identification of problems may be inexpensively resolved through the IRSí 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.

* * *

For further information about the IRSís efforts or if you need assistance in designing or implementing a compliance program we invite you to contact the author or your regular contact in Mintz Levinís Public Finance Section, linked below.