On January 26, 2009, the Internal Revenue Service mailed compliance check questionnaires to 200 state and local governmental entities that issued governmental tax-exempt bonds in calendar year 2005. The IRS sample is approximately 50 percent large issuers (entities issuing more than $10 million in 2005) and 50 percent small issuers. Recipients of the questionnaire have 90 days from the date of the letter accompanying it to respond. The IRS has stated that it would entertain requests for a 30-day extension on an individual basis.

What Does The IRS Mean By "Questionnaire?"

The questionnaire is designed to gather information on the procedures and record-retention practices of governmental entities to ensure that they comply with the federal tax requirements after their bonds are issued. It differs from audit correspondence letters sent by the IRS in the past stating that a particular bond issue was under examination and typically requiring production of extensive records.

Even though the compliance check is not a formal audit, an issuer is required to provide information under penalty of perjury and would likely be subject to audit if it failed to respond. The letter accompanying the questionnaire also states that if the IRS determines during a compliance check that an audit is appropriate, it may initiate one. 

What Information IBeing Requested?

The questionnaire asks several questions within broad subject areas:

  • Post-issuance compliance practices and procedures
  • General recordkeeping practices
  • Compliance with investment and arbitrage rebate rules
  • Documentation relating to bond expenditures for assets
  • Tracking of private business use 

In helping 501(c)(3) organizations respond to a similar questionnaire, we found that two areas in particular raised the most questions: 

  • It is not clear what type of "written procedures" the IRS expects a governmental entity to have in place to monitor post-issuance compliance. There is no specific requirement in the existing tax laws that governmental entities have written procedures and no guidance on what might suffice for answering the question. Issuers may have many different types of policies and procedures in place that would be responsive to the questionnaire, and it will take time to determine the date of adoption of the procedures and to describe the procedures in detail in the questionnaire response.

  • An issuer's record-retention and record-destruction policies may vary with the type of record and varying state law requirements over the term of the bond issue, but the questionnaire seems to contemplate a single response.

The Public Finance lawyers at Ballard Spahr Andrews & Ingersoll, LLP are happy to answer any questions you may have about the IRS compliance check questionnaires or any other bond-related matters. Please contact Linda B. Schakel at 202.661.2228, schakel@ballardspahr.com  for more information.

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