The Internal Revenue Service Office of Tax Exempt Bonds (the “IRS”) has announced a new sequester reduction in amounts paid to issuers of direct pay bonds for which issuers elected to receive a direct payment from the U.S. Treasury pursuant to Section 6431 of the Internal Revenue Code. The reduction applies to certain direct pay bonds, including: Build America Bonds (BABs) (which includes Recovery Zone Economic Development Bonds (RZEDBs)); Qualified Zone Academy Bonds (QZABs); Qualified School Construction Bonds (QSCBs); Qualified Energy Conservation Bonds (QECBs); and New Clean Renewable Energy Bonds (NCREBs). The reduction does not apply to tax credit bonds for which the holder of the bonds receives a tax credit.
The sequester reduction for the federal fiscal year 2016 (October 1, 2015 through September 30, 2016) will be 6.8 percent. Such reduction percentage differs from the 7.3 percent reduction applied to direct pay bond payments for federal fiscal year 2015, which will end on September 30, 2015. The reduction for the federal fiscal year 2014 was 7.2 percent. The reduction for the federal fiscal year 2013 was 8.7 percent. This means that payments processed by the IRS on or after October 1, 2015 and on or before September 30, 2016 will be reduced by the sequestration rate of 6.8 percent, regardless of when the amounts claimed by an issuer on any Forms 8038-CP are filed with the IRS. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.
The IRS announcement states that issuers should complete Form 8038-CP in the manner provided by the Form 8038-CP instructions, and that affected issuers will be notified by the IRS through correspondence that a portion of their requested payment is subject to the sequester reduction. Issuers should use this correspondence to identify the portion(s) of amounts that are subject to the sequester reduction.
Issuers with any questions about the status of refunds claimed on Form 8038-CP, including any sequester reduction, may contact IRS Customer Service Account Services at 1-877-829-5500.
For More Information
To discuss any of the topics covered in this Client Alert, please contact a member of our Public Finance Group.