IRS says most municipal audits are falling into four categories.

WASHINGTON About 82% of the 296 tax-exempt bond issues referred to Internal Revenue Service field agents for investigation or audit to date involve the four areas of potentially abusive deals targeted by the service in January, an IRS official said yesterday.

In addition to those 243 deals, another 26 issues referred for audit involve issuers who applied for refunds of arbitrage rebate overpayments, and the remaining cover a variety of miscellaneous issues, Marcus Owens, the director of the IRS's exempt organizations division, told a meeting of the National Health Lawyers Association here.

In a separate development, IRS assistant commissioner James McGovern told the health lawyers group that guidelines for recruiting physicians included in a recent closing agreement between the IRS and a Houston hospital should not be used by other hospitals seeking guidance about the appropriateness of their recruitment practices.

Owens told the association that the audits are "going to give us one of our first windows on the extent of general compliance" in the tax-exempt bond area.

In January, the IRS said it wanted to focus on four areas of potential abuse: 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 putchased at greater than fair market value; and small-issue industrial development bonds in which the issuers may have exceeded the $10 million capital expenditure limit.

McGovern, meanwhile, told the health lawyers they should not be relying on the details of a closing agreement with Hermann Hospital made public earlier this month.

"Closing agreements are not precedential," said McGovern, who is assistant commissioner for employee plans and exempt organizations. "No one but the taxpayer is entitled to rely on the agreement or any of its provisions," he said. The closing agreement permitted the hospital to keep its tax-exempt status and to move forward with a delayed $161.27 million bond issue for additional facilities.

The agreement contained the first ever comprehensive physician recruitment guidelines for a 501(c)(3) hospital, prompting some bond lawyers to say that the IRS took the unusual step of publicizing the agreement so that other hospitals would use the guidelines as precedent.

But McGovern denied that was the case, saying the IRS wanted the agreement made public merely to send a signal to other hospitals that the IRS is serious about enforcing rules for 501(c)(3) organizations.

Some lawyers seemed stunned by McGovern's statement, and said they had welcomed the Hermann Hospital guidelines because there has long been a need for guidance regarding which physician recruitment activities might jeopardize a hospital's taxexempt status. One lawyer told McGovern that, in the absence of such guidance, hospitals will continue abusive practices.

"You gave the guidance," the lawyer said. "Now it just went out the door," he said, adding, "It's going to be a wide-open field all over again."

When asked by a reporter if the IRS planned to provide broad guidance for hospitals on physician recruitment practices, McGovern said, "we clearly need precedential guidance in this area."

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