Tax Exempt Bond Backgrounder
Tax-Exempt Bond Examination Results Used to Focus Customer Education Programs
August 2003
Reference Number: 2003-10-172
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
August 19, 2003
MEMORANDUM FOR COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: Gordon C. Milbourn III /s/ Gordon C. Milbourn III
Assistant Inspector General for Audit (Small Business and
Corporate Programs)
SUBJECT: Final Audit Report – Tax-Exempt Bond Examination Results Are Used to Focus Customer Education Programs (Audit # 200210050)
This report presents the results of our review to determine if Office of Tax Exempt Bonds (TEB) management uses the results of tax-exempt bond examinations to focus their taxpayer education and outreach efforts in order to provide Tax Exempt and Government Entities (TE/GE) Division customers with top quality service by helping them to understand and comply with the applicable tax laws.
In summary, we found that TEB function management adequately used the results of examinations to focus their taxpayer education and outreach programs. Interpretive guidance had been developed for all examination issues involving noncompliance that we reviewed. The TE/GE Division’s Internet website provides customers with links to interpretative documents related to tax-exempt bonds, such as Private Letter Rulings and Field Service Advice.
However, the website does not have interpretative guidance for all applicable Internal Revenue Code (I.R.C.) sections related to tax-exempt bonds, nor does it have direct links to the applicable I.R.C. sections. Consequently, we recommended that the Director, TEB, modify the TE/GE Division’s Internet website to provide direct links to applicable I.R.C. sections.
Management’s Response: The Commissioner, TE/GE Division, agreed with our recommendation and will modify the website to include links to applicable I.R.C. sections. Management’s complete response to the draft report is included as Appendix IV.
Table of Contents
Background
Tax-Exempt Bond Examination Results Are Used to Focus Customer Education Programs, but Additional Information Should be Provided to Improve Customer Service
Recommendation 1:
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Management’s Response to the Draft Report
Background
The Office of Tax Exempt Bonds (TEB) within the Tax Exempt and Government Entities (TE/GE) Division administers the Federal tax laws applicable to tax-exempt bonds. Tax-exempt bonds include governmental and qualified private activity certificates of debt that are issued by state and local governments or by organizations acting on their behalf, such as universities and non-profit organizations. They are used to finance various tax-exempt projects, such as courthouses, hospitals, airport expansions, and highways.
Bond issuers are required to meet certain requirements under the Internal Revenue Code (I.R.C.) for the interest received by the bondholders to be exempt from Federal income tax. If the proceeds of the tax-exempt bonds are not used for their intended purpose, the bond may no longer be tax-exempt, and the issuing organization may be liable for the taxes as well as paying sanctions.
TEB function management stated that bond customers paid $9.9 million in sanctions in Fiscal Year (FY) 2000, $5.7 million in FY 2001, and $31.7 million in FY 2002.
The tax-exempt bond sector is experiencing dramatic growth.
Between 1985 and 2000, more than 400,000 Information Returns for Tax-Exempt Bonds (Form 8038) were filed with the Internal Revenue Service (IRS). During the same period, the value of outstanding bonds grew by more than 125 percent, from $650 billion to nearly $1.5 trillion. In addition to the growth, regulations governing tax-exempt bonds are among the most complex in tax administration.
The goal of the TEB function is to provide its customers with top quality service by helping them understand and comply with the applicable tax laws and protect the public’s interest by applying the tax laws with integrity and fairness. To achieve this goal, the TEB function has concentrated its efforts in three areas:
· The Customer Education and Outreach Program is designed to assist members of the bond industry in understanding their tax responsibilities. TEB function management believes that one potential reason for noncompliance is a lack of understanding of the complex legal requirements.
· The Voluntary Compliance Program is designed to foster voluntary resolution of violations of the I.R.C.
· The Examination Program is designed to determine if bond issuers comply with the legal guidelines for tax-exempt bonds. The TEB function completed 344 examinations in FY 2002, which included both correspondence examinations and field examinations.
Ø A correspondence examination is a limited scope examination conducted via correspondence. If significant tax issues are identified during a correspondence examination, the examination may be converted to a field examination of the bond issuance.
Ø A field examination is a broader scope examination that ensures bond issuers comply with the pre- and post-issuance requirements necessary for the bond issuance to qualify for and maintain tax-exempt status.
The TEB function tracks noncompliance issues identified from examinations to determine where to focus future educational efforts in order to reduce noncompliance. At the time we began our audit, principal issues of potential noncompliance were input to the Quarterly Field Reports and forwarded to the TEB function headquarters office each quarter.
During our audit fieldwork, the TEB function began using the Audit Information Management System (AIMS) to manage its inventory of open examination cases and capture information about issues that were identified during examinations.
In addition, examiners prepared Exempt Organization Examined Closing Records (Form 5599) to record and capture primary issue codes that indicate specific areas of noncompliance. Periodically, TEB function examiners and management have focus group meetings to identify the prevalent issues that should be addressed through customer education.
August 2003
Reference Number: 2003-10-172
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
August 19, 2003
MEMORANDUM FOR COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: Gordon C. Milbourn III /s/ Gordon C. Milbourn III
Assistant Inspector General for Audit (Small Business and
Corporate Programs)
SUBJECT: Final Audit Report – Tax-Exempt Bond Examination Results Are Used to Focus Customer Education Programs (Audit # 200210050)
This report presents the results of our review to determine if Office of Tax Exempt Bonds (TEB) management uses the results of tax-exempt bond examinations to focus their taxpayer education and outreach efforts in order to provide Tax Exempt and Government Entities (TE/GE) Division customers with top quality service by helping them to understand and comply with the applicable tax laws.
In summary, we found that TEB function management adequately used the results of examinations to focus their taxpayer education and outreach programs. Interpretive guidance had been developed for all examination issues involving noncompliance that we reviewed. The TE/GE Division’s Internet website provides customers with links to interpretative documents related to tax-exempt bonds, such as Private Letter Rulings and Field Service Advice.
However, the website does not have interpretative guidance for all applicable Internal Revenue Code (I.R.C.) sections related to tax-exempt bonds, nor does it have direct links to the applicable I.R.C. sections. Consequently, we recommended that the Director, TEB, modify the TE/GE Division’s Internet website to provide direct links to applicable I.R.C. sections.
Management’s Response: The Commissioner, TE/GE Division, agreed with our recommendation and will modify the website to include links to applicable I.R.C. sections. Management’s complete response to the draft report is included as Appendix IV.
Table of Contents
Background
Tax-Exempt Bond Examination Results Are Used to Focus Customer Education Programs, but Additional Information Should be Provided to Improve Customer Service
Recommendation 1:
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Management’s Response to the Draft Report
Background
The Office of Tax Exempt Bonds (TEB) within the Tax Exempt and Government Entities (TE/GE) Division administers the Federal tax laws applicable to tax-exempt bonds. Tax-exempt bonds include governmental and qualified private activity certificates of debt that are issued by state and local governments or by organizations acting on their behalf, such as universities and non-profit organizations. They are used to finance various tax-exempt projects, such as courthouses, hospitals, airport expansions, and highways.
Bond issuers are required to meet certain requirements under the Internal Revenue Code (I.R.C.) for the interest received by the bondholders to be exempt from Federal income tax. If the proceeds of the tax-exempt bonds are not used for their intended purpose, the bond may no longer be tax-exempt, and the issuing organization may be liable for the taxes as well as paying sanctions.
TEB function management stated that bond customers paid $9.9 million in sanctions in Fiscal Year (FY) 2000, $5.7 million in FY 2001, and $31.7 million in FY 2002.
The tax-exempt bond sector is experiencing dramatic growth.
Between 1985 and 2000, more than 400,000 Information Returns for Tax-Exempt Bonds (Form 8038) were filed with the Internal Revenue Service (IRS). During the same period, the value of outstanding bonds grew by more than 125 percent, from $650 billion to nearly $1.5 trillion. In addition to the growth, regulations governing tax-exempt bonds are among the most complex in tax administration.
The goal of the TEB function is to provide its customers with top quality service by helping them understand and comply with the applicable tax laws and protect the public’s interest by applying the tax laws with integrity and fairness. To achieve this goal, the TEB function has concentrated its efforts in three areas:
· The Customer Education and Outreach Program is designed to assist members of the bond industry in understanding their tax responsibilities. TEB function management believes that one potential reason for noncompliance is a lack of understanding of the complex legal requirements.
· The Voluntary Compliance Program is designed to foster voluntary resolution of violations of the I.R.C.
· The Examination Program is designed to determine if bond issuers comply with the legal guidelines for tax-exempt bonds. The TEB function completed 344 examinations in FY 2002, which included both correspondence examinations and field examinations.
Ø A correspondence examination is a limited scope examination conducted via correspondence. If significant tax issues are identified during a correspondence examination, the examination may be converted to a field examination of the bond issuance.
Ø A field examination is a broader scope examination that ensures bond issuers comply with the pre- and post-issuance requirements necessary for the bond issuance to qualify for and maintain tax-exempt status.
The TEB function tracks noncompliance issues identified from examinations to determine where to focus future educational efforts in order to reduce noncompliance. At the time we began our audit, principal issues of potential noncompliance were input to the Quarterly Field Reports and forwarded to the TEB function headquarters office each quarter.
During our audit fieldwork, the TEB function began using the Audit Information Management System (AIMS) to manage its inventory of open examination cases and capture information about issues that were identified during examinations.
In addition, examiners prepared Exempt Organization Examined Closing Records (Form 5599) to record and capture primary issue codes that indicate specific areas of noncompliance. Periodically, TEB function examiners and management have focus group meetings to identify the prevalent issues that should be addressed through customer education.
