The IRS published final regulations on November 13, 2014, governing claims for refund of arbitrage rebate overpayments.  The final regulations do three main things. First, they set a two-year statute of limitations on requesting refunds, running from the final rebate computation date. Second, they provide that if you file a refund request, the IRS can ask you for more information. They give the IRS the power to set a deadline by which you have to respond, but the deadline can’t ever be shorter than 21 days. Third, they provide that you can appeal a denial of a rebate refund claim to the IRS Office of Appeals.

Under the final regulations, a refund claim for a rebate overpayment on a tax-favored bond issue must be filed within two years after the final computation date for the issue, which is generally the final retirement date of the issue. This two-year limit generally applies to issues for which the final computation date is after June 24, 2008.  If the final computation date for the issue is on or before June 24, 2008, the issue is deemed to have a final computation date of July 1, 2008, and the two-year limit applies on this basis.

Because rebate payments for a bond issue are required to be made at least every five years, a common reason for a rebate overpayment is that positive arbitrage (i.e., investment of unspent bonds proceeds at a yield that exceeds the yield on the bonds to the bondholders) during the first five years that a bond issue is outstanding is offset by negative arbitrage in the second five-year period resulting from a decline in interest rates.  Of course, in order for this to happen there must be unspent proceeds of the issue during the second five-year period, so this is most likely to occur in the case of issues having a reserve fund.   Another common reason to request a rebate refund is to correct a prior mistaken calculation that resulted in an overpayment.

Under the final regulations, the IRS may request additional information regarding a refund claim, and reject a claim if that information is not timely provided. The final regulations give the IRS discretion in setting the deadline by which the issuer must respond to requests for information but, based on comments received after publication of the proposed regulations, the final regulations give issuers a minimum of 21 calendar days to respond to any request for additional information. The final regulations also provide rules to address when extensions may be granted (for unusual circumstances) and provide for an appeals process.  The rules described in this paragraph generally apply to issues for which the final computation date is after September 16, 2013.

Because the final regulations have changed the procedures for processing arbitrage rebate overpayments, the IRS intends to publish guidance updating Rev. Proc. 2008-37, which outlines the procedures for recovery of a rebate overpayment.

The final regulations and the preamble are available at the Federal Register website.