Risk of an IRS Audit of Tax-Exempt Bonds Has More Than Doubled

Published by Michael Novogradac on Thursday, August 30, 2012 - 12:00am

The Internal Revenue Service (IRS) is conducting more examinations of the municipal bond sector, according to a new report by the Treasury Inspector General for Tax Administration (TIGTA). In a review of the IRS’s Tax Exempt Bonds (TEB) Office’s enforcement activities over a five-year period, TIGTA found that its examination program has dramatically increased coverage of the municipal bond sector by conducting more examinations.

The report reviewed statistical data for the TEB office’s enforcement activities from October 2004 through September 2010 to assess the office’s efforts in identifying noncompliant bonds. Here are some of the takeaways: 

  • TIGTA auditors found that the TEB office more than doubled the number of examinations conducted per year since TIGTA last reviewed enforcement activities from Fiscal Years 2002 through 2004.
  • TIGTA reports that the TEB office assessed more than $84 million in sanctions between FYs 2005 and 2010 related to these examinations.
  • Moreover, TIGTA notes that the TEB office accomplished these results while significantly decreasing the amount of time it spends examining municipal bonds ̶ from more than 100 staff days per examination in FY 2002 to approximately eight staff days in FY 2010.

However, TIGTA also notes that while the TEB office is uncovering noncompliance through its examination program and completing examinations quicker, it still spends a substantial amount of time examining compliant bonds. Similar to a prior audit conducted in 2005, auditors determined that more than one-half of the examinations conducted by the TEB office do not uncover noncompliance.