In September 2011, the IRS revised Form 8038-G, which is the information return that issuers must file in connection with issuance of tax-exempt governmental obligations. The revised form includes two new questions regarding whether the issuer has effected written procedures to verify compliance with certain rules.
First, on line 43, the IRS asks whether “the issuer has established written procedures to ensure that all nonqualified bonds of this issue are remediated according to the requirements of the Code and Regulations…” If the issuer takes a deliberate action after the issue date that causes the conditions of the private business tests or the private loan financing test to be met, then such issue is also an issue of private activity bonds. Section 1.141-2(d)(3) of the Regs defines “deliberate action” as any action taken by the issuer that is within its control regardless of whether there is intent to violate such tests. Section 1.141-12 sets forth the conditions for taking remedial actions that prevent an action that otherwise causes an issue to meet these tests from being classified as a “deliberate action.”
Next, on line 44, the IRS asks whether “the issuer has established written procedures to monitor the requirements of Section 148.” Section 148 addresses arbitrage, yield restriction, and rebate requirements.
These new questions do not create new rules or impose new obligations on issuers. However, issuers’ failure to implement written procedures could increase the risk of audit.