TEB - Computation of Taxpayer Exposure

Taxpayer exposure represents the estimated amount of tax liability the United States would collect from the bondholders if the bondholders were taxed on the interest they realized from the bonds during the calendar year(s) covered under the closing agreement.

Compute the taxpayer exposure for an exam closing agreement as follows:

Step 1. Determine the closing agreement period. This is the period to be covered under the closing agreement by identifying each past calendar year (as determined below) and each future calendar year during which the bonds were or will be outstanding.

Bonds that have been called for redemption and defeased by a defeasance escrow are considered outstanding until their date of redemption; other bonds are considered outstanding until their maturity date.

Past calendar years generally include calendar years that have a tax payment date that falls within three years of the date TEB identified the compliance failure.

A tax payment date for a calendar year is April 15th following the conclusion of that calendar year.

For exam purposes, TEB identifies a compliance failure on the date it notifies the issuer in writing of that identified issue.

Step 2. Determine the amount of interest accrued or scheduled to accrue on the bonds in each calendar year within the closing agreement period based on the yield of those bonds.

For bonds originally sold at a discount or premium of less than 5%, you may use the actual amount of interest paid or to be paid.

For variable rate bonds, you may determine the interest scheduled to accrue in future years by using the average of the interest rates paid to date, the last interest rate paid on the bonds, or the appropriate fixed swap rate less up to 50 basis points, as appropriate under each exam’s facts and circumstances.

Step 3. Multiply the amount determined in Step 2 for each calendar year by the relevant tax percentage. Unless specifically instructed otherwise or a more accurate measure of the particular holder’s tax rate is available, use the rates below.

For calendar years before 2018, use 29%.

For calendar years after 2017, use the sum of (i) the backup withholding rate on interest payment pursuant to IRC 3406(a)(1) and (ii) the net investment income tax rate specified in IRC 1411(a)(1), in effect during the calendar year. For interest scheduled to accrue after the closing agreement is executed, assume no change to these tax rates from the rates in effect.