WASHINGTON -- It'll never be a best-seller, but a new IRS technical manual is topping bond lawyers' reading lists because of its detailed look at the agency's ideas on investigating certain types of potentially abusive bond deals.
"This is a fascinating glimpse into the Internal Revenue Service's thinking on its fledgling audit program," said a Washington, D.C., lawyer who admitted he hadn't yet read it.
"This paper is a good step in furthering the service's audit program in an attempt to educate its field agents," said Richard Chirls, a lawyer with Orrick, Herrington & Sutcliffe in New York, who did read the document.
Most lawyers interviewed acknowledged they hadn't looked at the publication, but said it would be important for them to do so. They plan to zero in on one 44-page chapter on tax-exempt bonds in the manual released by the IRS last month, titled "Exempt Organizations: Technical Instruction Program for Fiscal Year 1995."
Earlier this year, the agency announced it was beginning a random audit program for tax-exempt bond issues, as well as a more targeted examination of issues the IRS has identified as giving rise to possible abuses.
The targeted audits will focus on four areas that are described in detail in the technical manual: bond issues with back-loaded debt service payments that may be arbitrage-driven; guaranteed investment contracts that may have been purchased at greater than fair market value; advance refundings in which escrowed securities may have been purchased at greater than fair market value; and small-issue industrial development bonds in which the issuers exceeded the $10 million capital expenditure limit.
For the few bond lawyers who have already read the manual's bond chapter, the most helpful section deals with the IDB capital expenditure limit. They said they were surprised the agency would zero in on such a small part of the market, but for anyone planning to issue an IDB, the checklist of items that auditors should look for is helpful.
"If you're dealing with a small issue, I would definitely read it because it does review the law pretty well," a West Coast lawyer said, pointing to the section's details on "things you want to make sure you've checked on, because it's something the auditors are liable to check on."
Lawyers also said they had a number of concerns about the document. Despite its overall value, the bond chapter seems to fall short in certain areas, and may not give sufficient instruction to auditors who may have little experience in the tax-exempt bond area, they said.
"I question whether it provides enough practical guidance for an agent to really understand a transaction and to enable him to dig for where the problems might lie," Chirls said.
For example, the section dealing with backloaded debt service describes deals where bogus bond insurance is purchased, purportedly to protect the credit quality of the issue, but in fact to earn huge arbitrage profits.
Lawyers said the discussion of bogus bond insurance follows along the lines of IRS revenue rating 94-42 issued last June designed to crack down on such deals. In fact, the lawyers said, the discussion in the manual adds nothing to the revenue ruling, and an auditor would learn just as much by reading the ruling itself.
Other concerns centered around a few pages in the chapter devoted to audit techniques. The West Coast lawyer said the IRS appeared to give short shrift to closing agreements. Auditors need specific instruction as to the amounts appropriate to charge issuers who are settling with the IRS to avoid loss of tax exemption, an issue not addressed in the manual, he said.