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Improvements Needed in IRS' Tax-Exempt
Bond Oversight

for such goals in its overall planning efforts and has been making progress
in developing and addressing IRS-wide goals. At present, IRS' progress in
tax-exempt bond administration and oversight cannot be measured
because clear objectives, strategies to achieve them, resource needs, and
the goals against which to adequately measure this progress have not been
established.

Conclusions

IRS has taken a reactive approach to tax-exempt bond oversight, and, as in
other areas of tax administration, has relied on tax-exempt bond market
participants for voluntary compliance. However, over the last 25 years, the
tax-exempt bond industry has evolved from one that concentrates on
relatively simple financing of traditional governmental projects to one that
increasingly includes complex, innovative financing of projects involving
private parties. At the same time, numerous intricate tax-exempt bond
statutory and regulatory requirements have been established to guide this
more complex industry. This new environment has made compliance more
difficult and has created greater opportunities for noncompliance. Over
time, IRS has become more aware that noncompliance within the
tax-exempt bond industry occurs and has begun to understand the new
opportunities for noncompliance. Because IRS must balance tax-exempt
bond enforcement efforts against its many other responsibilities, it must
use its limited tax-exempt bond oversight resources as effectively and
efficiently as possible.

In recent attempts by Employee Plans and Exempt Organizations to more
proactively test the market, unsuspected potential compliance problems
have emerged. In contrast, the Expanded Bond Audit Program, IRS'
principal effort to oversee tax-exempt bonds, has continued to focus on
past abuses that were externally identified. Officials in this primary
tax-exempt bond oversight program are just beginning to consider how a
more active and ongoing enforcement effort may be instituted. Although
the past abuses this program is addressing merit attention, we believe that
IRS can have a positive impact on the level of compliance by partially
redirecting its Expanded Bond Audit Program resources to oversee
current market activities. An active and current presence in the market
can yield useful information about the extent of compliance in market
segments and better enable IRS to judge whether it is obtaining an
acceptable deterrent effect from its enforcement presence. Market forces
cannot take the place of an independent IRS presence; we believe, as do IRS
and others, that voluntary compliance is stronger in an environment that
has independent oversight and enforcement.

Improvements Needed in IRS' Tax-Exempt
Bond Oversight

Additional improvements should also be made in the Expanded Bond Audit Program. IRS recently has begun to consider how to use available information more effectively for tax-exempt bond oversight. However, it has not identified the information it needs or developed systems and analytic methods to help it use such information to identify potential noncompliance. Such information also could assist IRS in determining staffing and training needs, what strategies to follow, and otherwise how to direct its enforcement efforts. IRS officials also have not provided agents assigned to the Expanded Bond Audit Program final guidance containing reliable procedures to detect noncompliance and consistently address potential abuses.

Staffing and training for the Expanded Bond Audit Program have not been reconsidered in light of the evolving program. Staff assigned to the Expanded Bond Audit Program are located in 24 districts and devote little time on average to tax-exempt bond work. Although the staff were given some training on the specific abuses IRS has been pursuing, providing such training on highly technical abuses to agents who have little opportunity to apply it may not be the most effective approach. If a more proactive oversight approach is adopted, revenue agents will need more comprehensive training so that they can detect abuses other than those that were included in their initial training. As IRS closes out the cases in its inventory, the appropriateness of the current staffing and training to a continuing Expanded Bond Audit Program should be reassessed. A more centralized staffing option may enable IRS to provide training more cost-effectively and may help agents gain greater expertise and skill in investigating these complex cases. Centralization need not entail costly relocation of agents but may incur additional travel expenses.

Although improvements can make Examination's Expanded Bond Audit Program more effective, IRS should consider how it can best use its overall resources to promote voluntary compliance with tax-exempt bond requirements. As an agency, IRS has been working to set agencywide goals, establish priorities, guide budget decisions, and measure the progress of its various organizations toward achieving well-defined objectives. Although they are beginning to consider how to improve IRS' tax-exempt bond efforts, IRS officials have not developed and executed a plan to guide these efforts or to help direct IRS' limited tax-exempt bond resources most effectively. Developing and executing an overall tax-exempt bond plan that takes into account the efforts of the Expanded Bond Audit Program as well as other existing and potential efforts would focus IRS' attention on identifying and resolving key tax-exempt bond issues and allow it to

Improvements Needed in IRS' Tax-Exempt
Bond Oversight

Recommendations

establish a clear direction for its tax-exempt bond efforts and move
toward achieving it.

So that IRS can better understand and more effectively deter tax-exempt bond noncompliance, we recommend that the Commissioner of Internal Revenue partially redirect existing Expanded Bond Audit Program oversight and enforcement efforts to include active testing of current market compliance.

To achieve more effective oversight using existing Expanded Bond Audit Program resources, we recommend that the Commissioner of Internal Revenue identify and make better use of information to detect noncompliance and direct enforcement efforts, provide final guidance to staff assigned to tax-exempt bond enforcement, and reassess staffing levels and locations and training needs to take into account the program's future.

To make more effective use of resources throughout the agency to promote voluntary compliance in the tax-exempt bond industry, we recommend that the Commissioner of Internal Revenue develop and implement a plan to guide the agency's tax-exempt bond oversight efforts. The Commissioner should ensure that this plan does the following:

• Establishes clear objectives. These objectives should form the base on
which a comprehensive plan for IRS' tax-exempt bond work will be built.
• Includes coordinated and proactive strategies to achieve the objectives.
These strategies should specify who will have lead responsibility for IRS'
tax-exempt bond efforts, incorporate the roles of the many IRS components
with tax-exempt bond-related duties, and be used to assign responsibilities
clearly and hold responsible parties accountable. The overall strategies
should include a strategy for encouraging voluntary compliance that
defines a proactive role for IRS in the tax-exempt bond market.
Assesses staff and information needs to carry out the strategies. Through
this assessment, IRS Should determine how many staff members will be
required, where they will be located, and what skills and guidance they
will need. Further, the information that can be used to encourage
compliance with tax-exempt bond requirements beyond just information
needed for enforcement efforts should be identified as well as methods for
gathering, analyzing, and using it.

• Sets measurable goals. IRS should adopt specific goals so that progress
toward achieving them can be measured.

Improvements Needed in IRS' Tax-Exempt
Bond Oversight

Agency Comments and Our Evaluation

In oral comments on a draft of this report, IRS officials generally agreed with our recommendations and the information presented in this chapter. IRS officials agreed that they need a more effective means of assessing their tax-exempt bond program, which would include program staffing levels, locations, and training. In addition, they said that Examination would pursue a more specialized issue/industry examination approach for tax-exempt bonds that would include the development of specialized guidelines to be provided to field staff and updated when necessary.

Officials also agreed that IRS should determine what information would be helpful to target tax-exempt bond enforcement efforts. However, they said that a cost-benefit analysis should be done to determine whether additional data would detect noncompliance and to address the issue of the cost of additional data systems.

As we said in our draft report, IRS first needs to make better use of information it already collects on tax-exempt bond returns. IRS then needs to identify whether other information would help direct its enforcement efforts; and, having done so, IRS should certainly consider the costs and benefits of obtaining such information.

IRS officials also said that partially redirecting existing Expanded Bond Audit Program oversight and enforcement efforts to include active testing of current market compliance should be studied to determine if it would be an effective means for identifying tax-exempt bond issues for examination. We believe that IRS' moving away from its historically reactive tax-exempt bond oversight approach to a proactive oversight presence is vital to encouraging compliance. To this end, we believe that actual testing of more current bonds is essential. Such testing would provide IRS with a better understanding of current compliance issues and would provide an active enforcement presence in the tax-exempt bond market to encourage compliance.

IRS officials also said they did not agree that tax-exempt bonds should be
worked on by only a few agents. They said that they believed there should
be a national coordinator to oversee the activities and direction of IRS'
tax-exempt bond program in conjunction with specialized agents in
districts where they are needed and that this approach should accomplish
the goal of establishing a more proactive approach and result in better
overall communication.

Improvements Needed in IRS' Tax-Exempt
Bond Oversight

We did not intend to suggest that IRS Should only assign a few agents to the Expanded Bond Audit Program. In 1991, only about 2 staff years were expended by revenue agents spread throughout the districts on the Expanded Bond Audit Program. Because of several disadvantages to this staffing approach given the program's evolving direction, we recommended a reassessment of staffing levels and locations and presented as one possible option that IRS concentrate tax-exempt bond staff in fewer districts or centralize them in one location. Although we explained how IRS could do this if it decided to retain the 2-staff-year staffing level, we said that the level of staffing for IRS' tax-exempt bond enforcement efforts was a determination that IRS itself would have to make in light of its various enforcement responsibilities and judgments about the level of active enforcement that was needed both to counter existing tax-exempt bond abuse and to deter future abuse. While IRS should determine how many staff to assign, we encourage IRS to staff the program such that sufficient expertise can be developed by agents in this complex

area.

In their response to our recommendation that the Commissioner of Internal Revenue develop and implement a plan to guide the agency's tax-exempt bond oversight efforts that establishes clear objectives, includes coordinated and proactive strategies, assesses staff and information needs, and sets measurable goals, IRS officials said that although they thought the Expanded Bond Audit Program should set objectives and determine staffing and information needs, they did not agree the program should be included as part of the strategic business plan objectives. In addition, they said that even if it is expanded, it is doubtful that the program would merit a specific IRS-wide strategy.

We did not intend to suggest that IRS Should include a tax-exempt bond program as part of its strategic business plan objectives. Instead, in our report, we were using IRS' strategic management process, and the business plan that results from it, as an example of a process that includes good planning principles that we think IRS can apply to its tax-exempt bond efforts. We have changed the wording of our report to remove any implication that IRS' tax-exempt bond efforts should be part of its strategic business plan objectives. However, we continue to believe that all IRS functions involved with tax-exempt bonds should be included and involved in the planning effort just as they have been in the Tax-Exempt Bond Committee.

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