United States: IRS Pursues Audits of 1997 and 1998 Health Care Tax-Exempt Bond Issues

In 2005 the U.S. Internal Revenue Service (IRS) announced that it planned to audit qualified 501(c)(3) bonds issued about 10 years ago to measure compliance with ongoing requirements for use of proceeds. The IRS has now provided more details of the planned audit program. Beginning August 2006, the IRS will notify the issuers of between 20 and 30 qualified 501(c)(3) bond issues that their issues are under audit. The IRS will select from among those issued between May 1997 and the end of 1998. Two-thirds of the audits are expected to be hospital bonds, while the remainder are expected to be for economic development and 501(c)(3) housing projects.

We provide a detailed description of the requirements for use of qualified 501(c)(3) bond proceeds, the IRS bond audit and voluntary correction programs, and the steps that should be taken in an internal compliance review at http://www.mwe.com/info/pubs/taxexempt.pdf.

Section 501(c)(3) organizations with bonds issued between May 1997 and the end of 1998 should review those bond issues and usage records. These records should detail the use to which bond proceeds were originally put and demonstrate the proceeds (the bond-financed property) have been used appropriately since issuance. The IRS previously stated its plans to notify affected issuers of the audits around June 30 but in May delayed this notice for at least a month. The delay allows potentially affected organizations to review their bonds, identify any existing problems and bring problems to the IRS to initiate a voluntary correction action under the Tax-Exempt Bond Voluntary Compliance Program (VCAP) if necessary. The VCAP is not available once an issuer is notified that its bonds have been selected for audit. Section 501(c)(3) organizations should make sure their issuers are "up to speed" on this initiative.

The audit initiative will address record-keeping and accounting procedures, as well as a review of actual use (including any change in use from what was originally intended).

Record-keeping has long been an IRS concern. The IRS has indicated that it has been fairly forgiving of record-keeping deficiencies encountered during bond audits, but it will be less forgiving now that the need for records has been established. In fact, the IRS will audit bonds issued after May 1997 specifically because final regulations requiring lifelong measurement of the use of bond proceeds became effective in that month, making the need for long-term record-keeping evident. To further educate borrowers, in January 2004 the IRS published a list of FAQs on record retention requirements for tax-exempt bonds, available at http://www.irs.gov/taxexemptbond/article/0,,id=134435,00.html.

We can expect that during the audits the IRS will address such topics related to record-keeping as:

  • Are all bond proceeds properly accounted for?
  • Are lump-sum construction contract payments from the construction fund correctly traced to specific assets?
  • Is spending on common elements properly allocated?
  • Were the assets on which proceeds were spent covered by the initial public approval?
  • Was there a material change in actual spending from the planned spending on assets that was used to determine the maximum allowable weighted average maturity of the bonds?

The topics relating to post-issuance "actual use" involve evaluation of legal compliance issues associated with leases and contracts relating to bond-financed property. This includes compliance with the safe harbors set forth in revenue procedures 97-13 and 97-14 for "management" contracts and sponsored research. An additional aspect of actual use is documentation of compliance with the remedial action rules if the tax-exempt organization sells assets originally purchased with bond proceeds.

Of course, demonstrating post-issuance compliance also depends on adequate records of how property has been used since it was first placed in service. Demonstrating compliance with contract safe harbors depends on being able to produce all contracts in effect any time during the period since the property was first placed in service. Demonstrating compliance with rules for disposition of bond-financed property depends on knowing which property was actually acquired with bond proceeds and checking that information whenever there is a disposition of property.

Most tax-exempt hospitals and other tax-exempt organizations have qualified 501(c)(3) bonds outstanding, and the risk associated with non-compliance with private use rules could be significant. Even though section 501(c)(3) organizations that do not have bonds issued between May 1997 and the end of 1998 will not be targeted in the initial round of audits, these organizations should consider a focused review of outstanding tax-exempt bonds to prepare for future audits. Section 501(c)(3) organizations with bonds issued during the prescribed period should check all outstanding issues to see if they should apply for a VCAP request. An audit initially focused on bonds issued in the period could be expanded if the IRS finds systematic problems like weak record-keeping or post-issuance compliance monitoring that could affect all of the organization’s bonds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.