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Post-Issuance Compliance – More Than Just A Best Practice

May 6, 2014

Many issuers of tax-exempt bonds close the deal and never look back. However, post-issuance compliance (PIC) is just as important as pre-issuance compliance. Failure to adopt PIC procedures can result in inadvertently triggering taxable interest on bonds retroactive to the date of issuance. This affects not only the bonds at issue but can also negatively impact the ability to sell tax-exempt bonds in the future.

Now, more than ever, it is important that issuers implement procedures to assure PIC because the IRS has increased its auditing efforts. Over the past several years, the IRS has sent hundreds of questionnaires (often the precursor to an audit) to nonprofit and governmental issuers. In addition, the IRS has doubled the number of audits it has conducted on tax-exempt bond issues and increased its tax-exempt bond enforcement branch by over 100 employees.

Best Defense –  Establish Procedures

PIC procedures can help in a number of ways. First, they can prevent violations from occurring. Many compliance issues can be prevented if a responsible party is aware of PIC requirements and periodically monitors the status of the bonds. Second, PIC procedures can result in the identification of non-compliance issues, thereby allowing issuers to correct the non-compliance or obtain a more favorable resolution when correction is not an option. The IRS has publicly announced that issuers with violations identified through PIC procedures can generally expect to receive more favorable treatment under the IRS’s Voluntary Closing Agreement Program than issuers having no PIC procedures in place.

While not exhaustive, following is a list of issues that should be addressed in written PIC procedures:

Bond Related

  • Investment and expenditure of bond proceeds
  • Use of financed facilities
  • Purchase of investments
  • Credit enhancement transactions (such as swaps)
  • Subsidy payments (in the case of tax credit bonds)
  • Post-issuance modifications
  • Continuing disclosure obligations

Issuer Related

  • Identification of responsible person
  • Training and education
  • Periodic review
  • Records retention
  • Retention of professionals
  • Remedy of potential non-compliance

Preserve Institutional Knowledge

Written PIC procedures are particularly relevant in light of the retiring workforce and occurrences of structural downsizing. Key individuals at many issuers are looking to retire. In addition, many issuers are reducing their workforce. The result is that newer employees with additional workloads and without substantial institutional knowledge are tasked with ensuring PIC. New employees may not understand the importance of PIC, especially with a transaction that occurred years before they were hired. Written PIC procedures can assist in preserving institutional knowledge and efficiently transferring responsibilities so that their importance is not overlooked.

Avoid Loss of Tax Exempt Status

Of particular relevance to issuers today is the post-issuance use of financed facilities. At the time of issuance, issuers expect to use the bond-financed facilities for the life of the bonds. However, economic downturns have caused many issuers to cut expenses. As a result, many issuers are looking to sell or lease bond-financed facilities. However, the sale or lease of a bond-financed facility can be a “deliberate action” resulting in loss of the tax exemption unless certain remedial actions are timely taken. Written PIC procedures can help assure that responsible individuals are aware of potential violations and can proactively involve professionals in order to maintain the tax-exempt status of the bonds.

Get Started Now

PIC procedures should be adopted by all issuers. Without them, issuers risk post-issuance requirements that can have considerable long-term negative ramifications.

If you would like more information, please contact us. We can evaluate your current PIC obligations, prepare PIC procedures for adoption and assist you with implementation.

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