Tax Analysts provides news, analysis, and commentary on tax-related topics, including the latest developments affecting treatment of tax-exempt bonds.

Tax-exempt bonds are issued by state and local governments, and the interest on them is tax-exempt. There are different types of exempt bonds. The proceeds of qualified section 501(c)(3) bonds are used by charitable organizations to further their exempt purposes. The proceeds of qualified private activity bonds are used for a defined qualified purpose by an entity other than the issuer. With governmental bonds, the proceeds generally fund government activities or facilities such as schools, highways, and airports.

Direct pay bonds include/have included Build America Bonds (section 54AA; program expired in 2011), qualified energy conservation bonds (section 54D), qualified school construction bonds (section 54F), and qualified zone academy bonds (section 54E).

Issuers must satisfy post-issuance compliance requirements. According to information posted on the Tax-Exempt Bonds page of irs.gov, issuers must “monitor direct and indirect uses of bond-financed property over the life of the bonds and calculations of the percentage of nonqualified uses.” With regard to arbitrage, issuers must monitor “over the life of the bonds to determine whether the yield on investments acquired with bond proceeds are properly restricted and whether the issuer must file Form 8038-T to pay a yield reduction payment and/or rebate payment,” according to the IRS.

The IRS Tax-Exempt Bonds office has a voluntary closing agreement program through which issuers can try to resolve violations through closing agreements with the IRS.