Tax Policy and Administration:

Improvements for More Effective Tax-Exempt Bond Oversight

GGD-93-104: Published: May 10, 1993. Publicly Released: May 28, 1993.

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Pursuant to a congressional request, GAO reviewed: (1) the Internal Revenue Service's (IRS) role in ensuring compliance with tax-exempt bond provisions; and (2) policy changes that could enhance IRS ability to increase compliance with these provisions.

GAO found that: (1) IRS tax-exempt bond oversight relies on traditional enforcement activities such as voluntary compliance, review board regulations, and the Expanded Bond Audit Program; (2) IRS needs to establish a more proactive role in the Expanded Bond Audit Program so that it can determine compliance problems; (3) IRS could improve its ability to enforce Internal Revenue Code (IRC) regulations and monitor compliance by better utilizing the available information from tax-exempt bond returns, issuing guidance and procedures to agents to assist in their detection efforts, and providing sufficient staff and training; (4) IRS could better direct its compliance objectives, define tax-exempt departmental roles, determine methods for testing, identifying, and pursuing tax-exempt bond abuses, determine staffing requirements, and establish goals that accurately measure IRS progress by setting objectives and strategies for tax-exempt bond oversight; (5) tax-exempt bond enforcement penalties are inadequate, not widely known, and not frequently applied; (6) the basic penalty IRS has used involves taxing abusive bondholders' earned interest, however, IRS is reluctant to issue the penalty because it punishes investors rather than responsible parties, is complex to administer, and is disproportionate; and (7) although tax-exempt bond voluntary compliance could be enhanced by increasing market participants' access to risk investment information, IRS is prohibited from disclosing information that identifies parties to a noncomplying tax-exempt bond transaction.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: This matter for congressional consideration is contingent on action by IRS. GAO has asked IRS about the extent to which the section 6700 penalty has been tested. IRS has not responded.

    Matter: If after testing IRS finds that the section 6700 penalty is not effective in encouraging compliance in the tax-exempt bond market, Congress may want to consider further revising section 6700 or adopting additional penalties.

  2. Status: Closed - Not Implemented

    Comments: Congress has not acted on this recommendation since the issuance of the report 6 years ago.

    Matter: Congress may want to consider adopting other penalties for specific kinds of noncompliance.

  3. Status: Closed - Not Implemented

    Comments: Congress has not acted on this recommendation since the report's issuance 6 years ago.

    Matter: Congress may wish to consider whether permitting the disclosure of some tax-exempt bond-related tax information, with appropriate safeguards, would improve overall compliance incentives in the tax-exempt bond industry.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS has completed a review of the use of the IRC 6700 penalty (relating to abusive tax shelters) with respect to tax-exempt bond cases and has concluded that the application of IRC 6700 to certain tax-exempt bond cases would be appropriate, depending on the particular facts and circumstances. GAO has repeatedly asked IRS to tell it the extent to which the section 6700 penalty has been tested. It has not yet responded.

    Recommendation: The Commissioner of Internal Revenue should test the use of the penalty contained in IRC section 6700 for promoting abusive tax shelters in appropriate tax-exempt bond abuse cases to determine whether this penalty is an effective tool for encouraging tax-exempt bond voluntary compliance. In doing so, the Commissioner of Internal Revenue needs to determine whether in practice the penalty is reasonably administered and is of sufficient magnitude to deter noncompliance.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS has given additional focus to its tax exempt bond oversight activities by creating a separate unit responsible for such activities as part of its recent reorganization and by increasing the number of staff devoted to these activities. The new Tax Exempt Bonds unit is coordinating its efforts with those of other government agencies, particularly SEC. IRS now prepares annual workplans to promote voluntary compliance and guide the tax-exempt bond oversight efforts. These plans include targeted compliance projects, specific objectives for key district offices, and guidelines for resource use in those offices. The Tax Exempt Bonds unit is to develop balanced performance measures during FY2001.

    Recommendation: To make more effective use of resources throughout the agency to promote voluntary compliance in the tax-exempt bond industry, the Commissioner of Internal Revenue should develop and implement a plan to guide the agency's tax-exempt bond oversight efforts. The Commissioner should ensure that this plan: (1) establishes clear objectives; (2) includes coordinated and proactive strategies to achieve the objectives; (3) assesses staff and information needs to carry out the strategies; and (4) sets measurable goals.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: To achieve more effective oversight, IRS now identifies areas of potential noncompliance by using a computer database of information from Forms 8038 and 8038-G. Training classes have been held to train agents to examine municipal financing arrangements and guidelines for audits and closing agreements have been issued. IRS has also given additional focus to its tax exempt bond oversight activities by creating a separate subunit responsible for such activities as part of its recent reorganization and by increasing the number of staff devoted to the activities.

    Recommendation: To achieve more effective oversight using existing Expanded Bond Audit Program resources, the Commissioner of Internal Revenue should identify and make better use of information to detect noncompliance and direct enforcement efforts, provide final guidance to staff assigned to tax-exempt bond enforcement, and reassess staffing levels and locations and training needs to take into account the program's future.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS consolidated its tax-exempt bond enforcement activities under the Assistant Commissioner/Employee Plans and Exempt Organizations. Areas of current market compliance are being emphasized, areas of potential noncompliance targeted, and general correspondence checks conducted. IRS is also emphasizing public education and information dissemination, including exploring the possibility of making public announcements naming bonds that lose their tax-exempt status.

    Recommendation: So that IRS can better understand and more effectively deter tax-exempt bond noncompliance, the Commissioner of Internal Revenue should partially redirect existing Expanded Bond Audit Program oversight and enforcement efforts to include active testing of current market compliance.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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