WASHINGTON - Seven Internal Revenue Service district offices throughout the country have each been directed to conduct audits of four tax-exempt bond issues during the next fiscal year under the new tax-exempt bond enforcement program, an agency official said yesterday.

"I think every key district is being asked to look at four that are not 501(c)(3) conduit borrower type situations," Debra Kawecki, assistant branch chief for the technical section of the IRS' exempt organizations branch, told state and local officials attending a Government Finance Officers Association seminar here. The IRS has 63 district offices. Auditors for the exempt organizations branch are in seven of them.

Kawecki made the statement after being asked when the exempt organizations branch, which has taken over the tax-exempt bond enforcement program, will begin auditing bond issues other than those associated with nonprofit organizations. She did not spell out why or how the four bond issues in each of the seven districts would be chosen.

Directives to audit other kinds of bond issues, she said, were put into work plans that were recently distributed to IRS district offices and that should be made public during the next few months.

Exempt organizations branch agents in the seven district offices should begin training for the new audits during the next few weeks, Kawecki said. The seven district offices are in New York City, Baltimore, Atlanta, Dallas, Cincinnati, Chicago, and Los Angeles.

Kawecki told one local official attending the meeting that the audits will focus on specific bond issues rather than issuers because "we weren't given the authority to examine issuers."

The new audit activity will come on top of the exempt organizations branch's ongoing audits of 27 hospitals, universities, and other nonprofit organizations that have engaged in tax-exempt financing.

The IRS will begin taking enforcement action against some of these 27 organizations "relatively soon in terms of government time," Kawecki said at the seminar.

She repeated a warning made earlier this year by Marcus Owens, director of the exempt organizations technical branch, that some of these organizations are going to lose their tax-exempt status.

"And when that goes, the tax-exempt status of the bonds goes with it," Kawecki said.

Some of these organizations will lose their tax-exempt status because they no longer qualify for it, Kawecki said. A few may have flawed bond issues, she continued, adding, however, "I think that's going to be rare."

Kawecki said some of these organizations may reveal that they have been subject to IRS enforcement action. While IRS officials are prevented from disclosing specific taxpayer information, she said the exempt organizations branch typically tries to encourage the organizations it audits to reveal they have been subject to enforcement action.

The exempt organizations branch will shortly publish an "action plan" for the new tax-exempt bond enforcement program, Kawecki said. The plan, which has been drafted but still must be reviewed by high-level agency officials, will be broadly brushed rather than detailed and will be a "to do list" or a "road map of what we think we need to do over the next couple of years," Kawecki said.

The exempt organizations branch was given responsibility for the new tax-exempt bond enforcement program, Kawecki said, because it had been doing an increasing number of audits involving tax-exempt bonds and because of its broad programmatic approach to its mission.

"We've always been viewed as a different part of the service that wasn't up there toting up the bottom line to make sure you paid your money, and the government was made whole in that respect," Kawecki said. A major concern for the exempt organizations branch, for example, is to see that charitable organizations are serving charitable purposes, she said.

"It was felt that [the bond] area would lend itself to that method of regulation," she said.

Kawecki cautioned tax-exempt issuers or borrowers against panicking if "we come knocking at your door" for an audit of a bond issue, saying the audit may show nothing is wrong with the issue. She urged issuers to be patient with exempt organizations auditors, saying they will not be as sophisticated in the bond area as they should be at first.

"Call the national office and let us know if you are having a problem" with an agent who is "going down an alley that [you think] doesn't need to be explored," Kawecki said, giving out her telephone number.

The exempt organizations bond branch, she said, is thinking about asking Congress to give the IRS "more measured penalties" for tax-exempt bonds that target the party that committed abuse than "the exploding-bomb penalty of taxing bondholders" who are usually innocent of any wrongdoing.

"In certain egregious circumstances, everyone in the service recognizes we will have to tax the bondholder," Kawecki said. But she added that "this is not the remedy of first choice' and that "we would rather settle problems in a way that makes the government whole and in a way that tells the public what was the problem, what was going on here."

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