It Could be You: Understanding Post Issuance Bond Compliance Policies and Responsible Parties

One advantage for nonprofit organizations is the ability to finance facility expansion, refinance old debt, or obtain money for other reasons through the use of tax-exempt bonds. This allows the organization to raise capital while offering tax incentives to the bond holders, but this benefit does not come without the responsibility of complying with post issuance bond compliance. Maintaining post issuance bond compliance records will be extremely important if your bond is selected for audit by the IRS. According to IRS statistics, for fiscal year 2022, the IRS performed 334 tax-exempt bond audits which is up from 286 audits during fiscal year 2021. In addition to the reporting requirements relating to your specific bond, this information is reported on Schedule K of Form 990 filed with the IRS each year.

Post issuance bond compliance generally falls into two categories: qualified use of proceeds and financed property and arbitrage yield restriction and rebate. In order to maintain the requirements of post-issuance bond compliance, it is a best practice to adopt written procedures and policies for monitoring compliance. The policy sets forth guidelines and procedures to effectively manage the bond to prevent any actions that could potentially jeopardize the status of the tax-exempt bond. In many cases, the policy will broadly address the requirements for post issuance bond compliance while supplemental detailed procedures are also written to help the organization comply with their policy. These written policies and procedures can include provisions relating to the following areas:

• Monitoring private business use.
• Monitoring the spending of proceeds on qualified items within required timeframes.
• Performing arbitrage calculations.
• Identifying the official or employee responsible for the review.
• Training the responsible individuals.
• Maintaining adequate records.
• Procedures to timely identify any noncompliance.
• Procedures to ensure the issuer will tax steps to correct noncompliance.

Each organization determines their responsible individuals. Various positions may be identified in your policy as the responsible party including a CFO, finance director, comptroller, bond trustee, or legal counsel. The individual may be identified by name or position. It is important that the responsible parties be reviewed periodically and updated to account for such things as change in personal, change in department organization, or change in job title. The policy may identify more than one individual or department to be responsible for compliance.

For example, your policy could explain there is a requirement to annually monitor private business use. A policy may state that, on an annual basis, the organization is responsible for monitoring and limiting the use of bond-financed facilities. The policy includes guidelines for determining and calculating private business use, identifying potential private use arrangements, and compliance with the private use limits as stated by the Internal Revenue Code.

Below are three examples of procedures that may be in place to ensure compliance with the policy stated above.

1. Develop a comprehensive annual review process that assesses the use of all bond-financed facilities over the past year including the identification of any new contracts or agreements entered into, as well as review ongoing arrangements that might constitute private business use. The Compliance Officer (a member of the finance department) is assigned to carry out this procedure.
2. Implement a methodology for calculating the percentage of private business use of bond-financed facilities. The Controller is responsible for the calculation of private business use on an annual basis.
3. Create a checklist or screening tool to evaluate new and existing contracts for possible private business use. This should involve analyzing terms and conditions to see if they meet IRS safe harbor provisions or if they require further analysis. The Bond Compliance Officer works in tandem with legal counsel to identify potential private use arrangements.

There is a very large set of bond documents that are put on a shelf or saved in an electronic file after the bond financing is completed. Individuals in the finance department may not know who is responsible for annual compliance or whether it was done. Often, the response to a request to obtain information on private business use is “We have no private business use, they looked at it when they refinanced the bond.” But, if the bond refinancing was 6 years ago activities may have changed, there may be a new management company running food service, they may have temporary staffing, and they may have a small room where employees can drop dry cleaning. All of these items may create private business use. It is the responsibility of the organization to understand what could possibly generate private business use and to monitor it. If the policy is to have bond counsel review all new management contracts, it is important that there is a procedure in place for an individual to gather all new management contracts and provide them to bond counsel for review. The conclusion of the review should be documented and if private business use is generated it must be tracked.

The responsible person tasked with maintaining post issuance bond compliance policies could be you! If you are in the finance department or upper management, your first step should be to find the policies and make sure everyone understands who is responsible. Next, make sure your organizations are following the steps to have everything documented for annual compliance. This will be very important if audited by the IRS.