United States: Tax-Exempt Bonds: IRS Expands Written Post-Issuance Tax Compliance With New Schedule K Question

The IRS recently expanded the areas in which written post-issuance tax compliance procedures are being recommended and sought from 501(c)(3) organizations. In the new Schedule K to Form 990 for fiscal year 2011, the IRS added a Part V, which provides this text:

"Check the box if the organization established written procedures to ensure that violations of federal tax requirements are timely identified and corrected through the voluntary closing agreement program if self-remediation is not available under applicable regulations."

A similar request for written post-issuance procedures by the Tax-Exempt Bond (TEB) group is contained in Form 8038 - the information return filed in connection with the issuance of tax-exempt bonds by 501(c)(3) organizations. Issuers of 501(c)(3) bonds have typically passed on to their nonprofit borrowers the requirement for written procedures as requested by Form 8038.

The creation of the Voluntary Closing Agreement Program (VCAP) group within TEB brought about increased enforcement of violations of the arbitrage and private-use restrictions through emphasis on self-correction by issuers and borrowers. Rather than waiting for bonds to be audited, the IRS recommends that issuers and borrowers, through VCAP, voluntarily notify the IRS of their noncompliance, typically pay a negotiated penalty and enter into a closing agreement to maintain the tax-exempt status of their bonds.

Although VCAP traditionally has been viewed as a voluntary avenue by which issuers and borrowers can correct problems with their tax-exempt bonds, this new item on Schedule K suggests that violations of federal tax requirements that are not correctable through self-remediation under applicable regulations must be corrected through VCAP. The advisability of a 501(c)(3) borrower adopting such written procedures depends on the facts and circumstances of each borrower, the nature of the violation and business considerations. We recommend that you analyze and discuss this issue thoroughly with knowledgeable advisers.

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