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VCAP - Fixing the Problem VCAP - Fixing the Problem

VCAP - Fixing the Problem

Sometimes it happens. Despite having appropriate post-issuance compliance procedures in place and good faith efforts to comply with them, sometimes mistakes are made by issuers or borrowers of tax-exempt bonds. This could result in violations of tax covenants jeopardizing the tax-exempt status of the bonds. In acknowledgment of these issues, the IRS has established its Voluntary Closing Agreement Program ("VCAP") as a way to assist governmental issuers and conduit borrowers in resolving violations of the federal tax laws applicable to tax-exempt bonds, tax credit bonds or direct pay bonds. VCAP allows issuers of such bonds to voluntarily approach the IRS in order to resolve any violations of tax law by entering into a closing agreement with the IRS. 

The VCAP process typically involves bond counsel working with the issuer or conduit borrower to prepare and submit a VCAP request to the IRS outlining the facts and circumstances surrounding the violation. The parties then work together to negotiate the settlement amount, essentially a penalty, to be paid in order to resolve the violation. In theory, an issuer's violation will be treated more favorably in a VCAP scenario than it would be if discovered by the IRS in the course of an IRS audit of the bonds. Once the IRS and the issuer have entered into a settlement agreement, the IRS may not reconsider that specific violation in the event of an audit, except in limited circumstances. Entering into a settlement agreement provides comfort to the issuer that it no longer has any audit risk with respect to such violation.

Upon discovery of any violations of tax laws or covenants, issuers and conduit borrowers should contact bond counsel for assistance in assessing the situation and determining how to best resolve the violations. 
For more information, contact a member of Ice Miller’s Municipal Finance Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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