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How to survive an IRS project audit!

• Why is the IRS auditing our Bonds? The IRS wants to ensure that the federal subsidy provided by the interest exclusion on bonds is properly applied.

• What is my experience? We (URFA) have completed 2 audits in the past 2 years. We expect this to be an annual occurrence.

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What are the major stages of an IRS Tax-Exempt Bond Audit?

• Selection of a Bond Issue for Audit• Notification to Issuer• Information Gathering• Receipt of No Change letter.• Did the Agent request a TAM (Technical Advice

Memorandum)?• Preliminary Adverse Determination • Settlement? Appeal to IRS Office of Appeals?• Final Adverse Determination/Conclusion of Audit

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What is the typical “selection process” for a TEB Bond Audit?

• IRS random audit• Review of returns filed by issuer or returns of

issuances involving conduit borrowers• Referrals from other federal agencies or internal IRS

sources• Information items prepared by IRS revenue agents

for follow-up action• Pickup of cases related to a current examination or

expansion of a claim into a field examination

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Key points to be aware of during the “Notification to the Issuer” process.• The examining agent is required to notify the issuer

of the specific tax-exempt bond issue under audit• In most cases the reason for the audit is also

identified• Throughout the initial stages of the audit and up

through the determination of taxability, the issuer of the tax-exempt bonds is treated as the “taxpayer,” even though, technically, the issuer will not be the party subject to the taxation in the event the bonds are deemed taxable.

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The “Information Gathering” stage

• The initial contact letter from the IRS will contain an Information Document Request (IDR).

• The IRS normally requires a complete response to the information document request within 30 days or less of its letter.

• As the audit proceeds, the IRS may send additional IDRs to the issuer and other parties.

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Typical information requested by the IRS

• Final copy of the Bond Transcript• Information related to the redemption or refinancing

of the Bonds• Arbitrage rebate computations• Trustee Statements for all funds related to the Bond

Indenture• Form 8038• Yield reduction payment computations and yield

restriction analysis

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Important points in the initial IRS Letter• The reason for the audit: “We have selected the Multi-family Bond issue

named above for examination. At this time, we have no reason to believe that your bond issue fails to comply with any of the applicable federal tax requirements.”

• “This correspondence examination is intended to assess the overall compliance risk of the bond issue. At this time, we are only requesting general informational responses, and are not requesting any supporting documentation. However, we reserve the right to expand this examination. Moreover, failure to timely respond may result in an expansion of this examination, including a request for supporting documentation.”

• Complete enclosed form 4564, Information Document Request.• Due date was 21 days from date of the letter.

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URFA completed 2 Audits: How do they compare?

• The first audit initially asked 29 questions followed by 8 additional questions. The timetable was as follows:– Initial Letter: 09/24/2009– Second Request for Information: 01/26/2010– Receipt of “ No change” letter: 11/05/2010

• The second audit contained 46 questions followed by 4 additional questions. The timetable was as follows:– Initial Letter: 05/15/2011– Second Request for information: 03/20/2012– No final resolution as of today

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Sample audit questionsCapitol Gateway Apts. Phase I Specific topics from initial IRS Letter.

• General Information (6 questions)• Occupancy(16 questions)• Low Income Housing Tax Credits (3 questions)• Non-Residential Uses (2 questions)• Proceeds of the Bonds (16 questions)• Record Retention and Post-Issuance Compliance

Procedures (3 questions).

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Retain Expert Legal AssistanceThis is a High Priority!

• Stakes are high!!• Assure that matters are presented properly to the

IRS• IRS may ask you to waive certain rights• Privilege and other rights are easily waived by

mistake• There could be a conflict having the bond counsel

firm that rendered the bond opinion represent the issuer before the IRS

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Sample Initial Audit LetterCapitol Gateway Apts Phase I

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Sample Signature Page/Penalty of PerjuryCapitol Gateway Apts. Phase IPlease Read!!

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Sample IRS 2nd Request LetterCapitol Gateway Apts Phase I

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Sample IRS 2nd Request Capitol GatewayInformation Document Request (IDR)

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Response letter to 2nd requestCapitol Gateway Apts Phase I

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Unanswered Questions

• What is the requirement for Public Disclosure?• What if you do not have the requested information?• How soon will a negative decision impact

bondholders? What is the statue of limitations?• Does the IRS offer a long-term repayment plan?• What is a TAM? Technical Advice Memorandum• What is the Voluntary Compliance Agreement

Program? Can only be completed prior to the initiation of the actual audit.

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