The Internal Revenue Service (IRS) has announced that post-issuance tax compliance (PIC) for municipal bonds has become a priority. This is supported by the declaration of PIC procedure adoption on Form 8038 and an increased emphasis on compliance and random audits of tax-exempt bond issues. These actions by the IRS follow regulatory changes, which generally require issuers and conduit borrowers to measure and account for private use and related tax compliance matters over the combined term of the original bonds and any refunding bonds. Meeting these new requirements increases the need for issuers and borrowers to implement rigorous PIC procedures, including a review process and effective recordkeeping.
Written procedures should contain certain key characteristics, including:
- Due diligence at regular intervals;
- Identifying the official or employee responsible for review;
- Training of the responsible official/employee;
- Retention of adequate records;
- Procedures for the timely identification of noncompliance; and
- Procedures ensuring that the issuer will take steps to timely correct noncompliance.
Issuers and borrowers that have effective PIC procedures in place are more likely to be able to respond to an IRS audit inquiry on a successful and cost effective basis. As an added benefit, these issuers and borrowers will be in a better position to take advantage of future refunding opportunities.
To that end, the Vermont Municipal Bond Bank has adopted its own Post-Issuance Compliance procedures. The VMBB has also developed a set of sample PIC procedures that borrowers are encouraged to adopt. These sample procedures can be found under the “Download Forms” section of this website. Finally, starting in 2013 the VMBB will be asking certain borrowers to certify as to the understanding of their PIC responsibilities and actions taken to remain in compliance.
PIC responsibilities are not new, but have always been a requirement of tax-exempt bonds. In keeping with its mission to provide municipalities with ease of access to bond financing, the VMBB is supplying PIC services that would otherwise have to be provided (and paid for) at the local level.