Tax Policy and Administration

Improvements for More Effective Tax-Exempt Bond Oversight Gao ID: GGD-93-104 May 10, 1993

Outstanding long-term tax-exempt bond volume doubled from 1968 to 1990, to about $796 billion, while foregone federal tax revenues grew proportionally, exceeding $20 billion in 1990. Congressional concerns focused not only on the foregone revenue but also on the increasing use of tax-exempt bonds to benefit private parties and issuers earning profits by investing bond proceeds in securities at higher interest rates. As a result, Congress expanded restrictions on tax-exempt bonds. This report reviews the Internal Revenue Service's role in ensuring compliance with tax-exempt bond provisions and discusses needed improvements.

GAO found that: (1) IRS tax-exempt bond oversight relies on traditional enforcement activities such as voluntary compliance, review board regulations, and the Expanded Bond Audit Program; (2) IRS needs to establish a more proactive role in the Expanded Bond Audit Program so that it can determine compliance problems; (3) IRS could improve its ability to enforce Internal Revenue Code (IRC) regulations and monitor compliance by better utilizing the available information from tax-exempt bond returns, issuing guidance and procedures to agents to assist in their detection efforts, and providing sufficient staff and training; (4) IRS could better direct its compliance objectives, define tax-exempt departmental roles, determine methods for testing, identifying, and pursuing tax-exempt bond abuses, determine staffing requirements, and establish goals that accurately measure IRS progress by setting objectives and strategies for tax-exempt bond oversight; (5) tax-exempt bond enforcement penalties are inadequate, not widely known, and not frequently applied; (6) the basic penalty IRS has used involves taxing abusive bondholders' earned interest, however, IRS is reluctant to issue the penalty because it punishes investors rather than responsible parties, is complex to administer, and is disproportionate; and (7) although tax-exempt bond voluntary compliance could be enhanced by increasing market participants' access to risk investment information, IRS is prohibited from disclosing information that identifies parties to a noncomplying tax-exempt bond transaction.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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