The IRS recently announced that it will devote 50% of the Tax-Exempt Bond office’s (“TEB’s”) budget for its 2016 fiscal year (beginning  October 1, 2015) to examinations.  Accordingly, issuers and conduit borrowers of tax-advantaged bonds should be very interested in the newly revised Internal Revenue Manual (“IRM”) procedures addressing the Voluntary Closing Agreement Program (“VCAP”), which is the subject of this blog.    In a very general sense,  VCAP is a program that permits issuers of tax-advantaged bonds to approach (run to) the IRS (the tax man) to confess to violations of the tax law before the IRS discovers such violations through its examination function.   The incentive for the issuer to confess is that the IRS will generally enter into a more favorable settlement agreement with an issuer that voluntarily comes forward, than it would if the same issuer’s violations are discovered during an audit.

Section 7121 of the Internal Revenue Code (“IRC”) authorizes the IRS to enter into a closing agreement with a taxpayer related to any tax imposed by the IRC.   Per Section 7121 of the IRC, any such agreement shall be final and conclusive absent misdeeds by the taxpayer (such as fraud, malfeasance or misrepresentation of a material fact).    That seems to provide the IRS with a lot of discretion.  However, both IRS Notice 2008-31 (the “Notice”) and the IRM restrict the IRS’ ability to enter into a closing agreement with an issuer of tax-advantaged bonds.

Per the Notice, the goal behind VCAP is to encourage issuers and conduit borrowers of tax-advantaged bonds “to exercise due diligence in complying with the IRC and to provide a vehicle to correct violations” of the tax law[2].   For this purpose, a “tax-advantaged bond” includes (a) tax-exempt bonds (such as those issued under Section 103 of the IRC), (b) tax credit bonds (including, but not limited to, CREBs, QZABs and QSCBs), and (c) direct pay bonds (including, but not limited to, BABs and RZEDs).

An issuer may request a closing agreement under VCAP if a few criteria are met.  First, the violation cannot be remedied under other remedial action provisions (such as Treas. Reg. §1.141-12) or other bond closing agreement programs (such as the program described in Rev. Proc. 97-15 addressing changes in use of proceeds).  In other words, this is intended to be an option of last resort.  Second, the tax-advantaged bond issue cannot already be under examination (including at appeals or in court).  Finally, the issuer or conduit borrower’s violation of the tax law cannot be due to willful neglect.

The following list highlights some of the new provisions in the IRM addressing VCAP:

      (1) Provisions have been added to the IRM stating that a closing agreement will not be reached under VCAP unless:

           (a)  the issuer works with TEB in good faith to reach a resolution throughout the entire VCAP process;

           (b) the issuer adopts and implements procedures to promote future compliance with the tax law; and

           (c)  a Form 8038 has been filed with the IRS for the relevant tax-advantaged bond issue.

      (2)  The IRM now sets forth changes to Form 14429, entitled Tax Exempt Bonds Voluntary Closing Agreement Program Request, that should be followed until a new Form 14429 is issued.

     (3) The IRM now sets forth a requirement that  VCAP requests use the VCAP Model Agreement (or a Specialty Agreement Template, if appropriate) once such an agreement is available and explain any deviations therefrom.

      (4) The IRM now states that when  VCAP does not result in a final resolution, TEB should consider whether  a referral to examination is appropriate.

      (5) The IRM now sets forth a prohibition against using proceeds of tax-advantaged bonds to make a settlement payment under VCAP or to redeem/defease non-compliant bonds.

      (6)   The IRM no longer states that the taxpayer may receive a more favorable settlement if the taxpayer has post-issuance compliance procedures in place.  (On a side note, rumor has it that the Form 8038/8038-G will eventually be revised to eliminate the questions regarding the existence of written post-issuance compliance procedures).

      (7)  The IRM also has added various provisions addressing specific violations that are too voluminous to address in this blog post.  Something to look forward to?

In conclusion, it should be noted that the new IRM guidelines are effective September 30, 2015.  So, run, run as fast as you can . . .



[1] Even those readers, like me, that are challenged by references to pop culture, should recognize this as a take-off from the Gingerbread Man fairy tale – “Run, run as fast as you can.  You can’t catch me, I’m the Gingerbread Man”.

[2] The IRS also recently announced that approximately 30% of TEB’s fiscal 2016 budget will be devoted to VCAP.   I am not sure whether this is an increase or not in the percentage of its budget previously devoted to VCAP.   However, I do know that the number of closing agreements entered into under VCAP has been increasing.  For example, in its 2014 fiscal year, TEB entered into 51 closing agreements under VCAP.  In its 2015 fiscal year, the number of closing agreements TEB entered into under VCAP increased to approximately 120.