WASHINGTON - A congressional subcommittee on Friday issued a report criticizing the Internal Revenue Service's enforcement efforts on tax-exempt bonds and announced it will probably hold hearings in July on the report's findings.
The General Accounting Office report (GAO/GGD-93-104), which was released by the House Government Operations' Subcommittee on Human Resources and Intergovernmental Relations, concludes that the IRS' bond enforcement program lacks strong centralized management, overall objectives and strategies, and adequate manpower and resources.
The IRS program is reactive rather than active, the report says, because it relies on tips from outsiders and is focused mostly on transactions that were rushed to market about 10 years ago to beat new tax laws.
The GAO calls for the IRS to strengthen the program and for Congress to consider granting the the agency the authority to assess alternative penalties for bond violations and to disclose information about its bond enforcement actions.
The report's findings are troubling to Rep. Edolphus Towns, D-N.Y., the subcommittee chairman, who is moving toward holding hearings on the report in late July, an aide said Friday.
"I think the report raises some very troubling questions about the oversight and administration of the tax-exempt bond program by the IRS," the aide said. "It also indicates that there probably has not been as vigorous oversight from Congress as there should have been. There's a need for both Congress and the IRS to step up to the plate. "
The GAO report had been requested by Rep. Ted Weiss, D-N.Y., the former subcommittee chairman who died last year.
The GAO found that the tax-exempt bond market contains many incentives for avoiding compliance with tax laws. The laws and rules governing municipal bonds are complex and burdensome, creating the potential for abuse, the investigative arm of Congress said. Many transactions are so complex, it is easy to make mistakes or hide abuse. And while issuers rely on bond counsel, bond opinions are based only on the information available at the time of issuance and not on any subsequent events, the GAO said.
In addition, the report says, issuers can reap huge profits from arbitrage-driven transactions and can take comfort from the fact that, historically the IRS settles disputes for an amount of money that is far less than the arbitrage profits.
As of June 1982, the GAO said, the IRS had reached 70 closing agreements with issuers since 1981. About two-thirds of these were reached during an eight-year period after issuers voluntarily came to the IRS with tax law concerns.
The "IRS did not independently identify these cases and did not obtain complete lists of bonds involving any common parties" that "potentially could have helped uncover additional similar abuses," the GAO said.
In March 1989, the IRS' Office of Examination Programs informally began an "Expanded Bond Audit Program" after the agency's Financial Institutions and Products division asked it to take the lead on bond enforcement, the GAO said. The program initially was to last only 12 to 18 months, but has since been extended through 1993.
Currently, as many as 27 examination revenue agents in 24 district offices have been assigned to work on the program, but only intermittently, the GAO said. In 1991, for example, the agents spent a combined total of about two staff years on tax-exempt bond examinations.
The report says that the agents were never given final procedures on bond enforcement and that the IRS has never established objectives or strategies for the program.
While the IRS has taken some limited steps toward a more active enforcement program, the GAO said, its current efforts are focused on about 30 issues that were rushed to market in the mid-1980s to beat new tax laws and that were identified as abusive mostly by outside sources. The IRS enforcement program does not currently randomly or selectively test bond issues for compliance and therefore has no basis for internally uncovering current abuses in the market, GAO said.
But the shortcomings of the program have long been known to IRS officials. The GAO report cites an internal memorandum from the office of chief counsel, dated Nov. 4, 1991, that noted that "the enforcement effort had been largely limited to well-publicized abuses" and that there is a perception in the industry "that issues that were not widely publicized were virtually immune from IRS scrutiny. " The memo said the IRS' bargaining position was "weak" because "the IRS was unable or unwilling to take enforcement actions other than reaching closing agreements."
The GAO recommended that the IRS consider establishing a strong centralized enforcement program with an increased dedicated staff and clear objectives, strategies, and goals. The report says the IRS should try monitoring tax law compliance by tapping into the wealth of information that it has obtained over the last 10 years from bond forms submitted by issuers.
Meanwhile, the IRS could promote voluntary compliance with the tax laws by using new penalties granted by Congress in 1989, the GAO said. These penalties, which have been used for abusive tax shelters, would permit the IRS to fine the parties in certain abusive bond transactions.
In addition, Congress should permit the IRS to disclose enforcement information about bond issues or parties that violate tax laws, the GAO said. Currently, IRS officials are prohibited from disclosing taxpayer information, but the GAO suggested that the prohibition should not apply to governmental issuers, which are supposed to be accountable to the public.