On January 26, 2009, the Internal Revenue Service sent a "Governmental Bond Financings Compliance Check Questionnaire" to 200 governmental units throughout the United States that issued tax-exempt bonds in 2005. The tax exemption for interest on bonds issued by state and local governments depends on compliance with requirements of the Internal Revenue Code for so long as the bonds are outstanding. Examples of post-issuance requirements include compliance with limitations on the investment of bond proceeds, a requirement to rebate investment earnings on bond proceeds to the federal government, and restrictions on the private business use of bond-financed property.
About half of those selected for these compliance checks were "small issuers" who had issued less than $10 million of bonds in 2005. The other half had issued more than $10 million of bonds in that year. The IRS did not target particular subgroups of governmental bond issuers other than by size. A copy of the form of Compliance Check Questionnaire is attached to this e-alert. The Questionnaire is similar to the one sent to 501(c)(3) organizations last year, and inquires into the issuer's policies for post-issuance compliance and record retention.
While the letter accompanying the Questionnaire makes clear that it is not an audit, representatives of the IRS have stated that failure to respond to the Questionnaire could in some cases cause the IRS to follow up with additional inquiries and potentially an audit.
Governmental issuers should review the form of Compliance Check Questionnaire and assess whether they have in place the types of written policies and procedures for post-issuance federal tax compliance and record retention that the IRS believes governmental issuers should have in order to reduce the likelihood that the tax exemption of outstanding tax-exempt bonds is jeopardized. Please click here to view Foster Pepper's e-alert of April 25, 2008, which was distributed in anticipation of this compliance check initiative by the IRS.
If you are an issuer of governmental bonds that receives a Questionnaire, or for assistance in preparing or updating a post-issuance federal tax compliance policy, please contact any member of our Public Finance group.
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