The Internal Revenue Service has told the city of Winchester, Virginia it closed an audit of $28.6 million in 2012 general obligation refunding bonds without taking any adverse action.

Winchester announced the decision Thursday in a public notice on the EMMA database of the Municipal Securities Rulemaking Board.

“By letter dated June 1, 2021, the IRS informed the city that the IRS had completed its examination with a ‘no change’ determination as to the tax-exempt status of the 2012 bonds,” the notice said.

The bonds were used for a tax-exempt advance refunding of debt issued in 2001, 2004, 2005, and 2006.

Winchester announced the audit in March. At the time, it was the first report by any issuer in 2021 of any type of IRS audit communication.

Since then, there has have been only two other IRS tax rulings publicly filed.

Separately, several school districts and the state government in Montana also have reported on the EMMA database that a new state law signed by the governor on May 6 will end the state tax deduction for certain school bonds after 2023 if those bonds are federally taxable.

The other two IRS cases involve a filing by El Paso County, Texas in regard to a preliminary adverse ruling that Series 2017 Bonds are taxable retroactively to the date of issuance and by the Santa Cruz County Jail District in Arizona of preliminary determination that its bonds are taxable retroactively to the date of issuance because the of their private business use.

Although many IRS audits of tax-exempt bonds are not reported on the MSRB database, the fact that only three have been reported almost halfway through the calendar year highlights the recent drop in enforcement actions.

In February the IRS Tax-Exempt Bonds unit reported that it closed around 200 fewer examinations in fiscal 2020 than had been expected because of the interruption caused by the pandemic.

New examinations were suspended between March and July of last year because of COVID-19.

As a result, the TEB unit closed nearly 300 cases instead of attaining its earlier goal of around 500 cases.

The earlier goal had been cited in a presentation to the National Association of Bond Lawyers more than a year ago but was not mentioned when the IRS announced its 2020 achievements in February.

The IRS said that its initial 2021 focus on tax compliance and enforcement involves potential arbitrage violations of Internal Revenue Code Section 148 by the investment of bond proceeds in higher-yielding investments beyond the allowable temporary period under Treasury Regulation (Treas. Reg.)1.148-2(e).

In fiscal 2020, the top IRS enforcement and compliance priorities were public safety and jail bonds, sinking fund overfunding, and variable-rate bonds.

The exams that TEB did close in fiscal 2020 involved a combination of “compliance strategies and referrals, claims and other casework,” the IRS said in a summary published by Edward Killen, the acting commissioner for Tax Exempt & Government Entities group.

The majority of those cases — 170 — involved compliance strategies that “resulted in a written advisory to the bond issuer, including issues such as private business use and issuance costs,” the IRS said.

In addition to those 170 cases, the TEB unit closed over 100 examinations that were largely referrals and a project examining private activity bonds issued by 501(c)(3) organizations. “The most prominent issues found in the cases examined were arbitrage – claims for refund, rebates and yield restriction – and private benefit,” the IRS said.

The final portion of cases involved fraud-related casework, including cases referred for criminal investigation.

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