Tax Alert: Schedule K and Post Issuance Compliance


Several recent developments have underscored the importance for Section 501(c)(3) organizations with outstanding tax exempt bonds of adopting and implementing procedures for monitoring their post issuance compliance with federal tax requirements.

At the recent Bond Attorneys Workshop of the National Association of Bond Lawyers, Steven Chamberlin, Manager of the IRS’s office of Compliance and Program Management, announced that the IRS will be committing resources to review the annual filings of Form 990 Schedule K (Supplemental Information on Tax-Exempt Bonds). This is the first time that the IRS has publicly stated it will actually screen the Form 990 data now submitted annually by Section 501(c)(3) organizations with outstanding tax-exempt bonds. The IRS plans to use the submitted information to initiate limited scope examinations designed to obtain additional information in problematic areas to assess whether further complete examinations should be commenced.

Mr. Chamberlin’s announcement follows on the heels of an Advanced Refunding Bonds Compliance Check Questionnaire sent out to 269 governmental entities and 31 exempt organizations in May of 2011. The Questionnaire, among other things, inquires whether the borrower has written procedures to timely identify and correct federal tax compliance problems. It also asks whether those responsible for monitoring compliance have been provided training or education.

In a further development, Mr. Chamberlin also announced that soon all Forms 8038 (the forms filed by governmental issuers whenever bonds are issued) will require the issuers to check a box indicating whether they have implemented reasonable written compliance procedures to periodically monitor use of financed property and investment of gross proceeds.

The foregoing developments clearly reflect an effort by the IRS to persuade both issuers and borrowers to (1) adopt written procedures to monitor post issuance compliance and (2) take reasonable steps to implement them. The forthcoming Schedule K reviews will certainly inform the IRS whether its efforts in the area are indeed improving compliance.