In an apparent effort to quell growing concerns in the marketplace regarding its enforcement of issuer compliance with respect to the Build America Bond ("BAB") program, the Internal Revenue Service recently posted a notice on its website clarifying some of its enforcement policies. According to the notice, the IRS "is aware that BABs and other direct-pay bonds present novel interpretive issues and factual scenarios for issuers" and, "[a]s such, compliance programs with respect to direct-pay bonds will reflect both the [IRS's] responsibility to promote compliance and its recognition of the importance of reasonable efforts to achieve compliance in light of such issues and scenarios."
The notice indicated that the IRS plans to update its voluntary closing agreement program ("VCAP") so that issuers may "resolve violations on a basis proportional to the violation." The VCAP is a program that allows issuers to resolve violations of the Internal Revenue Code by voluntarily entering into closing agreements with the IRS, which usually result in smaller penalties than would otherwise be assessed if the violations were uncovered in an audit.
Among other things, the VCAP updates being considered for BABs are expected to address the standards for violating the "de minimis" limitation on premiums and the requirement that 100% of the available proceeds must be used for capital expenditure, issuance costs, and a reasonable reserve fund. Until such changes are incorporated, the IRS has stated in its notice that issuers may still utilize the current tax-exempt version of the VCAP to resolve issues with their BABs.
You can read the IRS notice here.
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