New IRS Procedures for Issuers of Tax-Exempt Bonds
In October, the Internal Revenue Service released a revised version of Form 8038-G, the tax return that must be filed in connection with every issuance of tax-exempt bonds for a governmental purpose. The revised form includes new checkboxes asking whether the government that issued the bonds has written procedures regarding two areas of tax law.
First, the IRS asks whether "the issuer has established written procedures to ensure that all nonqualified bonds of this issue are remediated according to the requirements under the Code and Regulations." In some cases, after bonds have been issued, a government needs to change how it plans to spend bond proceeds or how it plans to use a project that was paid for with bond proceeds. In some cases, this change in use will trigger remediation requirements under the Internal Revenue Code and related regulations. This checkbox asks whether the government issuing bonds has adopted written procedures to verify compliance with these rules.
Second, the IRS asks whether "the issuer has established written procedures to monitor the requirements of section 148." Section 148 of the Internal Revenue Code contains the restrictions against arbitrage using proceeds of tax-exempt bonds and the requirements for limiting the yield of some investments and rebating some investment income to the United States. Nearly all governments that issue tax-exempt bonds must comply with these restrictions on arbitrage throughout the life of every bond issue. This checkbox asks whether the government issuing bonds has adopted written procedures to verify compliance with these rules.
While these new checkboxes on Form 8038-G do not create new rules that governments must follow, it is advisable for any government that issues tax-exempt bonds to adopt the written procedures described above. Failing to check both boxes could increase the chances of a bond issue being audited by the IRS, which can be a costly and time-consuming process. If any government would like assistance in drafting and adopting written procedures as requested by Form 8038-G, please contact any of the attorneys in Sherman & Howard's Public Finance Group.
If you have any questions regarding this article or its possible impact on your activities and operations, please contact your Sherman & Howard attorney or one of the attorneys in our Public Finance Group.
Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and the Firm.