IRS PUBLICATION 5091
BOND COMPLIANCE PRIMER 2016
Primer Objective:
On behalf of ACS, thank you for your interest in obtaining additional information surrounding
the post-issuance bond compliance requirements for issuers of tax-advantaged debt. The
intent of this Primer is to assist debt issuers and advisors with the recognition of key points
concerning the ongoing compliance requirements for tax-advantaged debt set forth by the
IRS & US Treasury Regulations (“Tax Code”).
While not a comprehensive review, after completing this guide you will be able to identify
the key concepts and “triggers” as outlined below in order to ensure debt portfolios remain
complaint with all applicable regulations:
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Use of Bond Proceeds – Private Business Use
Arbitrage Rebate & Yield Restriction of Funds
Record Retention Elements
The Importance of Post-Issuance Policies, Procedures and Due Diligence Reviews
Understanding of the TEB Voluntary Closing Agreement Program (VCAP)
The importance of recognizing and forming a basic understanding of these key concepts is
paramount in order to ensure tax-advantaged debt portfolios remain compliant with federal
tax regulations. In ACS’ 30 years of existence dating back to the inception of the
regulations, and as a firm that regularly interacts with issuers after the debt has been issued,
we have been able to construct a strong foundation of knowledge and expertise
concerning the aforementioned concepts. If at any time you would like to discuss these key
points in further detail—whether by phone, through a pre-arranged in-person training, or by
web, please feel free to contact me at your earliest convenience.
On behalf of all my colleagues at ACS, thank you again for your time!
Sincerely,
Stephen Broden, Vice President
Arbitrage Compliance Specialists, Inc.
303-867-7530
[email protected]
www.rebatebyacs.com
IRS Compliance Key Concepts:
The first step in complying with the Tax Code is following the key concepts listed below.
 Use of Proceeds Compliance - Private Business Use
 Arbitrage Rebate and Yield Restriction of Funds
 Record Retention
 Importance of Compliance Due Diligence
 Importance of Written Post-Issuance Procedures
 Understanding the TEB Voluntary Closing Agreement Program
Do you know how to handle each of the points listed above?
IRS Use of Proceeds Compliance:
Many issuers are not aware of the growing issues surrounding use of proceeds compliance
(private business use). Whether intentional or not the ramifications of violating these rules
can trouble an issuer for many years so it is good to ask yourself the following questions.
 Is the facility used in a manner that will benefit a for-profit entity or individual (private business
use test)?
 Is the facility owned or leased to a for-profit entity or individual (private security or payment
tests)?
 Are proceeds used to make or finance loans (private financing test)?
Can you answer “yes” to the questions listed above?
OR
Are you finding difficulty answering “yes” or “no” to the questions listed above?
A “yes” answer to one question may not cause an issue though it suggests further review is
necessary. Also, it is understandable if you are not sure whether the answer is “yes” or “no”
because the questions require an understanding of the common triggers that prompt an
answer.
Some common triggers:
 Sale of a facility or facilities
 Leases
 Management Contracts
Any issuers who have encountered triggers similar to those listed above should contact their
“consulting group” (financial advisor, bond counsel and compliance analyst) to further
discuss the matter. Issuers may also request specific training on this subject from ACS as part
of a group/individual webinar, self-study or prearranged on-site training.
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IRS Arbitrage Rebate and Yield Restriction of Proceeds Compliance:
Issuers often involve both internal and external parties with compliance associated related to
arbitrage rebate. This is likely a result of the administrative burden caused by extensive rules
that must be followed for the life of the debt. It is still essential to follow the rules and there
are specific rule concepts that will help most with monitoring the internal compliance.
Some common arbitrage rebate exception rule concepts include:
 Fund spending exceptions
Small issuer exception examples:

Issuer 1 has no taxing power, issues debt infrequently and generally for less than
five million dollars in aggregate each calendar year. Why is the issuer not
exempt from the arbitrage rebate rules?
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Issuer 2 has limited taxing power, issues debt infrequently and generally for less than
five million dollars in aggregate each calendar year. Why is the issuer exempt
from the arbitrage rebate rules?
Were you able to determine why each issuer was exempt/not exempt?
Some common yield restriction rule concepts include:
 Temporary periods
 Materially higher yields
Any issuer that has encountered yield reduction payments will be an advocate for deeper
understanding the yield restriction rules. These rules exist regardless of the small issuer
exception to arbitrage rebate referenced above.
Arbitrage rebate and yield restriction rules share specific similarities but are otherwise very
different. For example, arbitrage rebate focuses on the whole debt issue while yield
restriction is fund specific. Put simply, yield restriction relates to whether an issuer can earn
arbitrage versus arbitrage rebate which relates to whether an issuer can keep arbitrage.
Yield Restriction
(Earn it?)
vs.
Project
Arbitrage Rebate
____(Keep it?)
Reserve
Debt
Service
Project
The most significant similarity between arbitrage rebate and yield restriction is that payments
and reporting are due every five years and at the final redemption of the debt.
Any issuers who require arbitrage rebate and/or yield restriction services should contact their
“consulting group” to further discuss the requirements. Issuers may also request specific
training on this subject from ACS as part of a group/individual webinar, self-study or
prearranged on-site training.
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IRS Record Retention Compliance:
Record retention has proven to be one of the most challenging, ongoing compliance tasks.
The IRS does not have safe harbors in place to allow issuers reprieve from storing volumes of
debt issue data for extensive periods of time. IRS Section 6001 provides the checklist for
issuers seeking to comply with the federal tax record retention requirements.
The two major time concepts are provided below:
 Records must be retained for the life of the debt plus three tax years.
 In the event of a refinancing, records must be retained for the refinanced debt issue through
the maturity of the refinancing debt issue plus three tax years.
Do you currently know which records must be retained?
Any issuers who require review of the record retention rules should contact their “consulting
group” to further discuss the requirements. Issuers can visit the following link http://www.irs.gov/Tax-Exempt-Bonds/Tax-Exempt-Bond-FAQs-Regarding-Record-RetentionRequirements. Lastly, issuers may also request specific training on this subject from ACS as
part of a group/individual webinar, self-study or prearranged on-site training.
Importance of Compliance Due Diligence:
The key points of compliance due diligence for the previously referenced concepts is to help
issuers identify issues, prevent issues, and correct any violations. Issuers that fail to exercise
due diligence relating to compliance may have difficulty maintaining the tax-advantaged
status of their debt.
Importance of Written Post-Issuance Procedures:
Issuers are under increasing pressure to adopt appropriate written post-issuance procedures.
Whether triggered by a desire to check the applicable line items on the IRS filing form,
externally influenced by parties of the consulting group, or by internal pressure, these
procedures are components that support the ongoing due diligence process.
Key IRS characteristics include the following:
Due diligence review at regular intervals;
Identification of the official or employee responsible for review;
Training of responsible officials/employees;
Retention of adequate records to substantiate compliance (e.g., records relating to
expenditure/investment of proceeds, use of debt financed property and related
contracts);
 Procedures reasonably expected to timely identify noncompliance; and
 Procedures ensuring that the issuer will take steps to timely correct identified
noncompliance.
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Have you implemented written post-issuance procedures?
Any issuers who require written post-issuance procedures should contact their “consulting
group” to further discuss the requirements. Issuers may also request sample procedures and
training on this subject from ACS as part of a group/individual webinar, self-study or
prearranged on-site training.
Understanding the TEB Voluntary Closing Agreement Program:
Most issuers will never enter the TEB Voluntary Closing Agreement Program (“VCAP”) and
that is due to the fact that the program is designed for correction of violations that cannot
be corrected through other available programs.
Key Points:
 The closing agreements may be used to permanently and conclusively resolve
violations based upon the facts & circumstances of each case.
 The closing agreement committee ensures the fairness and consistency of proposals.
 The appeals process is available to issuers under examination when an agreement
cannot be reached at the exam level.
Any issuer who is contemplating VCAP should contact their “consulting group” to further
discuss the potential violation.
Issuers may also request further training on this subject from ACS as part of a group/individual
webinar, self-study or prearranged on-site training.
Summary:
IRS compliance for debt issues is often an administrative burden in both time and money for
issuers. By implementing internal policies to address each IRS compliance key concept,
issuers can better maintain the tax-advantaged status of each debt issue.
This primer is intended for all issuers and is based upon the IRS’ Publication 5091 which is also
attached as a reference. Many important IRS Publications are available publicly with the
most applicable ones listed within Publication 5091.
ACS supports the ongoing education of issuers and can send the other publications as
needed. Issuers may also request further training on specific subjects (not described as part
of this primer) from ACS as part of a group/individual webinar, self-study or prearranged onsite training.
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Our Firm:
ARBITRAGE COMPLIANCE SPECIALISTS, INC. “ACS”
ACS is a specialized accounting firm headquartered in Centennial, Colorado. Originally
founded by current President and CEO Janet Sacks, the firm began in 1986 as part of
Pricewaterhouse Coopers, subsequently transferring to Public Financial Management (PFM),
and eventually incorporating as Arbitrage Compliance Specialists, Inc. in 1994. Since its
inception, ACS has grown into one of the industry’s most experienced and independent
arbitrage reporting practices.
Currently, ACS provides its services to over 1,600 active debt issuers across the United States
and routinely completes thousands of arbitrage calculations annually, with over 50,000
completed since inception of the tax code in 1986.
ACS’ commitment to our clients is rooted in our philosophy to provide dedicated individuals
from our accounting and project management teams that bring stability, knowledge, and
years of expertise to ensure that our clients’ debt portfolios remain compliant with the tax
code. Our expert project managers provide a direct and immediate response to our clients’
needs—whether during an IRS audit, payment or overpayment recovery situation, or just any
questions relating to the complexities of the tax code.
Whether an issuer of tax-advantaged securities, financial advisor, underwriter or counsel to
issuers of tax-advantaged debt, please do not hesitate to reach out to ACS for any questions
you may have. We certainly look forward to speaking with you soon.
Sincerely,
Voluntary Compliance for
Tax-Exempt and Tax-Credit Bonds
Part one of this publication is a summary of highlighted considerations to help issuers of tax-advantaged
bonds comply with related federal tax law requirements. Part two is a summary of Tax-Exempt Bonds
Voluntary Closing Agreement Program (TEB VCAP) provisions.
Tax-Advantaged Bonds Compliance
The IRS Mission
Provide America’s taxpayers top quality service
by helping them understand and meet their tax
responsibilities and by applying the tax law with
integrity and fairness to all.
The office of Tax Exempt Bonds (“TEB”), of
the Internal Revenue Service (“IRS”), Tax
Exempt and Government Entities division,
offers specialized information and services
to the municipal finance community.
Municipal bonds provide tax-exempt
financing for the furtherance of governmental
and qualified purposes. Detailed educational
resources on post-issuance compliance
and voluntary compliance (including TEB
VCAP requirements) are available on TEB’s
website: www.irs.gov/Tax-Exempt-Bonds
Useful IRS Publications
1 Your Rights as a Taxpayer
4077 Tax-Exempt Bonds for 501(c)(3)
Charitable Organizations
4078 Tax-Exempt Private Activity Bonds
4079 Tax-Exempt Governmental Bonds
5005 Your Responsibilities as a Conduit
Issuer of Tax-Exempt Bonds
PART ONE: Introduction to Tax-Advantaged
Bond Compliance
Tax-advantaged bonds (tax-exempt, tax credit
and direct pay) are obligations that receive
preferential tax treatment under the Internal
Revenue Code (the “Code”). These bonds,
issued by or on behalf of state and local
governments, are subject to applicable federal
tax requirements both at the time of issuance
and as long as the bonds remain outstanding.
An issuer, conduit borrower, or other party’s
failure to comply with any applicable federal
tax requirements with respect to taxadvantaged bonds jeopardizes the preferential
tax status of those bonds.
Compliance at Time of Issuance
Compliance with certain applicable federal tax
requirements at the time the bonds are issued
include filing a Form 8038 series information
return (e.g., 8038, 8038-G, 8038-GC, or
8038-TC) and reasonable expectations by the
issuer that there will be ongoing post-issuance
compliance. Additional issuance requirements
might include a proper volume cap allocation
and public approval of the bond issue.
Compliance Following Issuance
Post-issuance federal tax requirements
generally fall into two categories: (1) qualified
use, including use of the bond proceeds and
the property financed by bond proceeds; and
(2) arbitrage, including appropriate restrictions
of investment yields and rebate of arbitrage
from the investment of bond proceeds.
Qualified use requirements require monitoring
of the various direct and indirect uses of bondfinanced property over the life of the bonds,
determination of the sources of debt service
payments and security for the debt, and
calculations of the percentage of nonqualified
uses within the project to be financed with
the bond proceeds. Arbitrage requirements
involve calculating and monitoring the yields
on investments, determining appropriate
restrictions on the investment yields,
determining the amount of arbitrage on the
investments, and calculating the amount and
timing of arbitrage rebate payments that must
be paid to the US Treasury.
There may be other post-issuance due
diligence requirements. For example,
some level of post-issuance monitoring
may be required to determine compliance
with issuance cost limitations applicable to
qualified private activity bonds.
Importance of Post-Issuance Compliance
The ongoing nature of post-issuance
federal tax requirements applicable to
tax-advantaged bonds requires issuers to
actively monitor compliance throughout the
entire life of their bonds. This due diligence
will significantly improve the issuer’s ability
to ensure the continued tax-advantaged
status of its bonds by: (1) identifying
noncompliance; (2) preventing violations from
occurring; and (3) timely correcting identified
violations (when prevention is not possible).
Role of Written Procedures in PostIssuance Compliance
Issuers should adopt appropriate written
procedures for their tax-advantaged
bond issues that go beyond reliance on
tax certificates provided at closing and
bond documents. Sole reliance on tax
certificates and bond documents may
result in insufficiently detailed procedures
or procedures not adequately incorporated
into an issuer’s operations. Appropriate
written procedures may contain certain key
characteristics including:
(1) Due diligence review at regular intervals;
(2) Identifying the official or employee
responsible for review;
(3) Training of responsible officials/employees;
(4) R
etention of adequate records to
substantiate compliance (e.g., records
relating to expenditure/investment of
proceeds, use of debt financed property
and related contracts);
(5) P
rocedures reasonably expected to timely
identify noncompliance; and
(6) P
rocedures ensuring that the issuer will
take steps to timely correct identified
noncompliance.
Establishing and following written monitoring
procedures helps issuers to preserve the
preferential tax status of their tax-advantaged
bonds. Generally, an issuer that has
established and followed comprehensive
written monitoring procedures to promote postissuance compliance will be significantly less
likely to violate the federal tax requirements
related to its bonds than an issuer without such
procedures.
Remedial Actions
An action that causes an issue to meet the
private business tests or the private loan
financing test is not treated as a deliberate
action if the issuer takes a remedial action
under the Treasury regulations. Application
of an appropriate remedial action prevents
the bonds from losing their tax-advantaged
status. Some of the more common deliberate
actions for which remedial action may be
available include:
(1) A
management contract that causes private
business use;
(2) The sale of bond-financed property;
(3) T
he lease of bond-financed property to a
nongovernmental person; and
(4) T
he failure to use 95% of net proceeds to
provide an exempt facility.
An issuer that discovers it has taken a
deliberate action that may result in a violation of
any of the federal tax requirements applicable to
its bonds should immediately ascertain if there
are available remedial actions under the Income
Tax Regulations (the “Treasury regulations”) or
other published guidance.
Record Retention Requirements
Various sections of the Code and Treasury
regulations, including, but not limited to,
sections 103, 141-150, and 6001 require
the retention of the records necessary to
substantiate compliance with federal tax
requirements applicable to tax-advantaged
bonds. Generally, any person subject to
income tax, or any person required to file a
return of information with respect to income,
must keep such books and records as are
sufficient to establish the amount of gross
income, deductions, credits, or other matters
required to be shown by that person in any
return. This includes Form 8038 series and
other returns filed by the issuer with respect to
a tax-advantaged bond issue.
PART TWO: TEB Voluntary Closing
Agreement Program
Introduction
The Tax Exempt Bonds Voluntary Closing
Agreement Program (TEB VCAP) is described
in Notice 2008-31, 2008-11 I.R.B. 592, which
provides information about TEB VCAP for
tax-advantaged bonds. This program provides
remedies for issuers who voluntarily come
forward to resolve a violation which cannot
be rectified under self-correction programs
described in the Treasury regulations or other
published guidance. Closing agreement
terms and amounts may vary according to the
degree of violation as well as the facts and
circumstances surrounding the violation. TEB
VCAP operating procedures are in section
7.2.3 of the Internal Revenue Manual (“IRM”).
Objective of TEB VCAP
TEB VCAP encourages issuers and other
parties involved in tax-advantaged bond
transactions to exercise due diligence in
complying with the applicable federal tax
requirements, and to provide a vehicle
to correct violations as expeditiously as
possible before they are discovered during
an examination. An issuer submitting a TEB
VCAP request can expect to settle the case
on terms that are no less favorable, and
generally on terms that are more favorable
than the settlement terms that would be
expected had the violation been discovered
as a result of an examination.
Availability of TEB VCAP
TEB VCAP is available to issuers of taxadvantaged bonds who have discovered
a violation of the federal tax requirements
applicable to their bonds. TEB VCAP is not
available for bonds under examination, or if the
tax-advantaged status is at issue in a federal
court or before the IRS Office of Appeals.
TEB VCAP is generally not available, absent
extraordinary circumstances, if the violation
can be resolved under existing remedial action
provisions or closing agreement programs
contained in the Treasury regulations or other
published guidance.
Submitting a TEB VCAP Request
A TEB VCAP request must include Form
14429 Tax-Exempt Bonds Voluntary Closing
Agreement Program Request, available on
TEB’s website at www.irs.gov/Tax-ExemptBonds. Form 14429 must be signed under
penalty of perjury and included at the
beginning of the request. This form assists
issuers in organizing their TEB VCAP requests
and ensuring that their submissions are
complete in accordance with the requirements
under Notice 2008-31 and IRM section 7.2.3.
Email requests with this required information
to: [email protected]. Requests may also
be mailed to: Internal Revenue Service, Attn.
TEB VCAP, 1122 Town & Country Commons,
Chesterfield, MO 63017.
TEB VCAP Resolution Standards
In order to standardize closing agreement
terms (including settlement amounts) and to
provide transparency to issuers and other
parties to tax-advantaged bond transactions,
TEB has described in IRM section 7.2.3
resolution standards that may be used
to conclusively resolve certain violations.
Methodologies relating to calculation of
settlement amounts under these resolution
standards are fully described in IRM section
4.81.6. If a violation does not fall within a
specific resolution standard, TEB VCAP
general resolution standards may be applied
on such terms as are determined appropriate
under the facts and circumstances. TEB
frequently expands the resolution standards
available under its IRM procedures in order to
address additional violations.
Resolution Standards for Tax-Exempt Bonds
IRM section 7.2.3.4.2 describes resolution
standards for specific violations of federal
tax laws applicable to tax-exempt bonds.
Examples of violations that these standards
address include:
(1) A final allocation of tax-exempt bond
proceeds to nonqualified purposes that
exceeds the defined percentage limits;
(2) Property financed with proceeds of a
qualified 501(c)(3) bond issue is owned
by a person other than a 501(c)(3)
organization or governmental unit;
(3) A failure to successfully remediate
nonqualified bonds through establishment
of a defeasance escrow because some or
all of the bonds are not callable within 10.5
years of the issue date;
(4) On an allocation of proceeds to property,
the average maturity of the bonds exceeds
120% of the average reasonably expected
economic life of such property; and
(5) A party to the escrow agreement fails to
meet their obligations to timely reinvest
proceeds of a refunding issue, upon
maturity of the investments, as directed by
the escrow instructions.
Resolution Standards for Direct-Pay Bonds
IRM section 7.2.3.4.3 describes resolution
standards for specific violations of federal tax
laws applicable to certain direct pay bonds.
Examples of violations that these standards
address include:
(1) A
deliberate action that causes build
America bonds to be private activity bonds;
(2) A
final allocation of proceeds to an
impermissible use; and
(3) T
he acquisition by an issuer of its own debt
instrument resulting in extinguishment.
Anonymous Request
A TEB VCAP request may be submitted on
an anonymous basis to find the appropriate
resolution method for a violation. This option
is intended to assist issuers in evaluating
appropriate resolution methods in instances
where the violations are novel or in instances
where there is significant uncertainty regarding
the appropriate settlement terms. The
anonymous request may only pertain to a
general matter, question, or factual scenario.
It may not be used to inquire as to appropriate
resolution methods for violations involving
detailed facts and circumstances.
Resolution Benefit for Issuers with PostIssuance Compliance Procedures
The TEB VCAP program provides an incentive
for issuers and conduit borrowers to implement
written post-issuance compliance monitoring
procedures. Under this program, issuers
that adopt written procedures to ensure their
tax-advantaged bonds remain in compliance
with all post-issuance related federal tax
requirements that are conditions to the
tax-advantaged status of the bonds may be
eligible to resolve violations on terms that
are more favorable than issuers that have
not adopted such post-issuance compliance
monitoring procedures. Please see section
7.2.3 of the IRM for additional information.
Publication 5091 (6-2013) Catalog Number 63020Y Department of the Treasury Internal Revenue Service www.irs.gov