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IRS audits tax-exempt bonds, finds nothing

Many of us in California have different types of investments, some of which are designed to minimize our tax liability. One of those is a tax-exempt bond. According to the Small Business Administration tax-exempt bonds are basically loans to a private business that are issued by the state or a local government. They are then re-sold on the open market. Interest income earned by the new bond owner, is exempt from state and local taxes, so the lender can pass those savings along in terms of lower interest rates.

We have posted several articles informing our readers about the increased efforts of the Internal Revenue Service to increase their revenue in a number of ways. Amnesties have been offered, and IRS audits have increased. Recently it was reported that the IRS conducted more audits of tax-exempt bonds this year. More audits mean more revenue - right? Wrong.

According to reliable sources, the IRS has doubled its audits of tax-exempt bonds since 2005, and yet the revenue from the audits has actually gone down. In fact, it was reported that the last year's audit found nothing. It wasn't stated whether or not that was an actual zero, or a figurative zero, but the lesson is the same. That lesson appears to be that either those creating the tax-exempt bonds are doing a very good job of it, or the IRS is not doing a very good job of spotting errors.

Uncollected taxes on tax-exempt bonds that were not properly set up or administered are potentially very big business for the IRS. The agency estimated that the municipal bond market is worth $3.7 trillion. In 2010, tax-exemption violations discovered through IRS audits led to $9 million in additional tax collections. This past year, it apparently led to nothing.

Source: Reuters, "US IRS audits of tax-exempt bonds up, tax recovered down-agency," Aug. 29, 2012

At our San Francisco Bay law office, we represent clients with tax issues including IRS audits and state audits.

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