Improvements Needed in IRS' Tax-Exempt Banking, Housing, and Urban Affairs, the preliminary results suggested a very high compliance rate with the requirements. Although it revealed few compliance problems, this project reflects the type of proactive enforcement that has been largely absent in the current Expanded Bond Audit Program and that could provide information on the level of compliance and how to target limited resources. Key industry participants and observers believe that a more proactive IRS enforcement presence for tax-exempt bonds is necessary to promote compliance. For example, in an April 1989 statement to the Chairman of the Treasury, Postal Service, and General Government Subcommittee, Senate Committee on Appropriations, the National Association of Bond Lawyers said the following: "The National Association of Bond Lawyers both supports evenhanded and vigorous enforcement of existing Federal Tax laws relating to state and local government finance and urges prompt adoption of clear, understandable and unambiguous amplifying regulations. This not the enactment of new legislation — is in our view the best and most effective method of assuring compliance with those laws, of preventing abusive practices in the issue of state and local government bonds, in containing further increases in issuance costs and in providing much-needed stability in the law." Association representatives reiterated this position in 1990 and 1991. Similarly, a former congressional staff member who was active in the development of tax-exempt bond legislative restrictions told us that if it does not pursue egregious abuses, IRS actually encourages noncompliance and when Congress perceives major compliance problems it steps in with additional restrictions. In describing shortcomings in IRS' tax-exempt bond enforcement efforts, an Office of Chief Counsel internal memorandum dated November 4, 1991, was critical of IRS' lack of an effective tax-exempt bond audit program. The memorandum emphasized that IRS' enforcement efforts were limited in scope and effectiveness. For example, it stated the following: • The enforcement effort had been largely limited to well-publicized abuses; there was some perception in the industry that issues that were not widely publicized were virtually immune from IRS Scrutiny. This effort had addressed only a limited number of types of abuses; the closing agreements that were reached essentially addressed only six types of abuses. Improvements Needed in IRS' Tax-Exempt IRS' Expanded Bond Audit Program Needs to Make Better Use of Tax-Exempt Bond Return Information for Oversight • The bargaining position of IRS was weak because IRS was unable or • Closing agreements generally resulted from issuers approaching IRS and Expanded Bond Audit Program officials have said they are pursuing the taxation of interest earned on some bonds that IRS considers abusive because the use of closing agreements may not be effective in promoting compliance. Most of the bonds this enforcement effort focuses on were issued during the surge preceding the 1986 Tax Reform Act's effective dates for related tax-exempt bond provisions and thus do not reflect market activity during the past 7 years. Moreover, almost all of the bonds under consideration were identified by external sources. Although such sources can provide valuable information about abuses in the market, IRS could obtain a broader understanding of current compliance problems by actively testing some more current issuances. IRS has recognized information as an important element for its tax-exempt bond administration and enforcement efforts. However, it has not identified a practical way to monitor compliance of issuers by using the information contained in returns that tax-exempt bond issuers are required to file. This lack of a method to monitor compliance reduces IRS' ability to effectively target efforts to detect and punish noncompliance. It also reduces IRS' ability to develop and target methods other than enforcement to encourage voluntary compliance. Issuers of tax-exempt bonds are required to file an information return for Improvements Needed in IRS' Tax-Exempt States Congress. However, IRS has not used these returns to enforce tax-exempt bond restrictions. Issuers also are required to submit a Form 8038-T Arbitrage Rebate when they rebate arbitrage to IRS. Arbitrage payments must be sent to the Philadelphia Service Center at least once every 5 years while the bonds are outstanding. According to an IRS official, issuers rebated approximately $91 million of arbitrage to IRS in 1991. In November 1990, a Tax-Exempt Bond Committee began meeting informally after concerns were expressed by the Philadelphia Service Center and problems were observed by Expanded Bond Audit Program officials regarding the processing of tax-exempt bond returns at the Philadelphia Service Center. The Committee was formally established in October 1991. According to an August 1991 memorandum from the Assistant Commissioner (Examination), the formation of the Committee was being sought because of "the importance of the Service's efforts in ensuring compliance in this area, the significant increase in the number and types of returns to review, and the current inability of the Service to effectively make use of existing information because of systemic problems." Despite these initial efforts, IRS has not yet identified a practical way to monitor compliance of issuers using information contained in Forms 8038 and 8038-T tax-exempt bond returns. Expanded Bond Audit Program officials have discussed the possibility of using Statistics of Income Division's tapes and outside databases to identify or sample tax-exempt bonds to audit. Beyond these potential interim steps, program officials also have expressed interest in developing an automated system to identify issuers who may be abusing arbitrage rebate requirements. In an April 1991 memorandum, the Assistant Commissioner (Examination) requested that the Assistant Chief Information Officer, Information Systems Management, establish a project development team "to analyze the functional needs and the corresponding systems capabilities" relative to the tax-exempt bond returns received by IRS. This request was partially based on the work of the Tax-Exempt Bond Committee and proposed that the team ⚫ determine if IRS' automated Master File could be modified to incorporate information from the tax-exempt bond returns to provide the capability of reviewing and retrieving that information; Improvements Needed in IRS' Tax-Exempt determine if a system could be developed to provide Examination, Chief Counsel, and Statistics of Income with the capability of reviewing/retrieving these data if the Master File could not be utilized to do this; ⚫ assist in building a classification system to provide Examination with the capability to identify the cases that have the greatest potential for examination; and ⚫ assist in developing a system to accurately compute the arbitrage rebate recorded on Forms 8038-T on the basis of other information contained on the forms. In May 1991, Information Systems Management responded that it would form a team to analyze the functional needs for the Expanded Bond Audit Program, including looking at the possibility of adding tax-exempt bond return information to the existing Business Master File or creating a separate file at the service centers to provide the requested capabilities. However, according to Examination officials, as of July 1992, Information Systems Management had not responded to Examination's request for assistance, so Examination had again asked for assistance to develop a system that would use master file information to select bonds for audits. IRS needs to determine how it can use information it collects from Guidance for the During training for the Expanded Bond Audit Program, some revenue agents received procedures drafted in May 1991; however, as of July 1992, these procedures had not been updated or finalized. All agents need final guidance that describes how the Expanded Bond Audit Program will operate and how to carry out their current responsibilities for determining compliance so that they have reliable procedures to detect noncompliance and consistently address potential abuses. Improvements Needed in IRS' Tax-Exempt Revenue agents need written guidance on such things as a program's purpose and procedures. According to the former analyst for the Expanded Bond Audit Program in the National Office, monthly reports were prepared to inform district revenue agents of program developments. Although examples of these reports were provided to us for July and October 1989, these were primarily reports on the status of ongoing investigations and not guidance. Between June 1991 and July 1992, two memoranda were sent to the field regarding the Expanded Bond Audit Program. The first, in January 1992, prioritized IRS' highest priority cases and provided very specific guidance on the circumstances under which to terminate or continue nonpriority cases (e.g., depending on when statutes of limitations expired and whether negotiations for a closing agreement had begun). The second memorandum, in May 1992, contained technical procedures for closing a case based on the circumstances (e.g., whether to use 30-day letter procedures, when to issue statutory notices, which tax returns to obtain, what to do if a petition were filed with the Tax Court). In May 1991, draft procedures for the Expanded Bond Audit Program were produced. This document contained some procedures for tax-exempt bond enforcement and was distributed in draft form to those revenue agents who took training in late 1991 and early 1992. These procedures provided a structure for revenue agents to follow in gathering information on arbitrage abuses. The draft also contains some guidance on how to determine whether the information they collect indicates that an abuse has occurred. As of June 1992, these draft procedures had not been updated or finalized. The IRM is designed to serve as the single official compilation of IRS' policies, procedures, instructions, and guidelines and to communicate them to those who need to implement them. For example, in March 1988, the Department of Treasury and IRS issued an eight-page IRM Supplement for Examination's low-income housing bond project that included purpose, scope, background, assignment of IRS management and implementation responsibilities, a check sheet, a list of 23 documents to request, at least 14 detailed steps to complete, and other practical aspects of the project. Since at least April 1989, Expanded Bond Audit Program officials have been planning to provide guidance for the program by expanding IRM materials to address the current program. However, as of July 1992, IRS had not issued an IRM supplement for the program. At that time, program officials said they were formulating a request to establish a task force to develop IRM provisions for the Expanded Bond Audit Program. |