WASHINGTON Aug 1 Tax-credit municipal bonds
present large risks for fraud, according to a heavily redacted
report from the federal government on Thursday that gave few
hints on how banks and other investors may use the debt to cheat
The bonds, which give buyers tax credits in lieu of
payments, could create a "significant loss of revenue for the
federal government," the Treasury Inspector General for Tax
Administration said, adding that the Internal Revenue Service
"cannot easily detect errors or potential fraud."
Issuers have mostly shunned tax-credit bonds. In 2009 and
2010, state and local governments issued only $4.8 billion of
them, according to the report. But many federal leaders,
including Senator Ron Wyden, the Oregon Democrat poised to head
the Finance Committee, promote them as an alternative to
tax-exempt bonds, which they say create outsized tax breaks for
the highest earners.
Parts of the report were hidden from the public because the
information could be used to circumvent regulations or statutes,
according to a TIGTA spokesman. Still, it revealed that the
credits are claimed by a group of taxpayers that is hard to
define, and for amounts that can reach into the millions of
"While the number of tax returns filed claiming bond tax
credits is small, the dollar value of bond tax credits claimed
per return can be significant and ranged from $1 to
approximately $244,000 for individual returns and up to
approximately $83 million for corporate returns," the report
In tax year 2011 there were 212 corporate returns filed
claiming a total of $334.9 million in bond tax credits, after
192 returns filed in tax year 2010 claimed $366.8 million in
credits, according to the report.
Also in tax year 2011, 1,153 individual returns claimed $3.1
million of credits, and in tax year 2010, 1,118 individual
returns claimed $2.2 million of credits.
The Treasury Department is concerned "multiple taxpayers
could improperly or fraudulently claim the same bond tax credit,
thereby reducing the amount of taxes paid."
Since creating the tax-credit form of debt in 1997, Congress
has authorized different programs to sell the bonds for specific
purposes such as school construction. With each authorization,
it tweaked the debt's structure, and the many changes "made the
population of owners of these credits more diverse." That, in
turn, made it harder for the IRS to trace the credits.
Initially, the bonds were privately placed with financial
institutions. Then they were sold on the open market. A legal
change allowed mutual funds to pass the credits on to their
Then, the 2009 economic stimulus plan allowed the credits to
be stripped and sold separately. But the financial crisis
dampened financial institutions' appetite for the debt as their
taxable income fell.
The inspector general made one recommendation on preventing
fraud or addressing the problems, but it was redacted from the
It did, however, provide an IRS response to the suggestion:
"IRS management agreed with this recommendation and plans to
perform an analysis of the population of bond tax credits. The
findings will be considered in determining any changes needed to
enhance the compliance strategy for detecting improper or
fraudulent claims for bond tax credits."