According to a notice posted on its website, the IRS has begun reviewing several taxable Build America Bonds issued in 2009 and 2010 to ensure the bonds were compliant with the tax code. The agency is also seeking to understand "practices in the relatively new market for BABs." ABC News.com posted an article explaining the IRS's review; you can find a snippet of their story below or check out the full text here.
Build America Bonds were created in last year's economic stimulus plan to spur investment in infrastructure. The bonds have become popular with cities and local governments because they pay a federal rebate equal to 35 percent of interest costs.
BABs have developed a large market share, accounting for nearly a quarter of new debt issues this year. Their success has inspired the U.S. Congress to change other bonds included in the stimulus plan to the same model -- taxable debt that pays a federal rebate.
This new model of debt is called "direct pay."
The IRS notice, which is dated October 25, says it is looking into whether issuers complied with limitations on premiums, capital spending requirements and limits on issuance costs. It is also looking into when BABs may be retired.
States and local governments selling the bonds are concerned about losing the federal rebate or having the payments delayed if the U.S. government says they have violated securities laws.
The IRS offered some reassurance in the notice, saying it is "committed to further developing its compliance programs for direct pay bonds similar to its compliance programs for tax-exempt bonds."