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Tax-exempt bond performance defended by IRS

WASHINGTON – The Internal Revenue Service responded to a May 23 Senate subcommittee hearing by pulling its Form 8038-G returns to argue that it audited less than 1 percent of direct tribal tax-exempt bond issuances between 2002 and 2005. A witness before the subcommittee, Gavin Clarkson, stated in his remarks and in his written testimony that the IRS had audited 40 percent of direct tribal tax-exempt bond issuances, compared with approximately 1 percent of municipal tax-exempt bond issuances.

The discrepancy is due either to privacy laws that keep the specific IRS reporting forms out of the public eye, or to fine distinctions in definition that create an “apples to oranges” comparison. Clarkson is not convinced that the percentage of tribal tax-exempt bonds audited by the IRS in those years is significantly lower than 40 percent. He needs more IRS data, he said.

Cliff Gannett, acting director of the IRS tax-exempt bonds division, said that between 2002 and 2005, 88 tribes issued a total 305 bonds that drew investments of approximately $700 million. The IRS audited less than 1 percent of the 305 issuances, he added.

Christie Jacobs of the IRS Tribal Governments Office said the IRS does not audit tribal tax-exempt bonds disproportionately, either through an intentional targeted program or inadvertently. Fearing an inadvertent discrepancy, she explained, the IRS has examined its records and found there is no discrepancy.

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She said there is no disagreement on the underlying law on tax-exempt bonds – it is different for tribes than it is for states. Gannett said a great deal of attention has been focused on this difference in law, both internally by the IRS and externally.

The difference is that unlike state and municipal governments, tribal governments can issue tax-free bonds only to finance “essential government functions” as defined by the IRS. In addition, the IRS defines essential government function for tribes in language that raises doubts among investors as to whether their investment in a tribal bond qualifies with the IRS as tax-exempt financing. Such doubts are known in capital markets as “risk,” and risk translates to a higher interest rate on the money invested in the purchase of a tribal bond. Without the better interest rates associated with undoubted tax-exempt bonds, debt service becomes prohibitive, especially for poorer tribes.

The sum of all this, according to a panel of witnesses May 23, is to create barriers for tribes that want to access capital markets by issuing bonds to build infrastructure, community centers, economic development, housing, schools and health facilities.