INDIAN WELLS, Calif. — The Internal Revenue Service plans to audit some Build America Bond issues to determine if they meet the tax requirement on issue price, an agency official said here last week.

“We will be sending out examinations and we will be sending out [information document requests] to specifically inquire about compliance with this requirement,” said Steve Chamberlin, senior manager of compliance and management in the IRS’ office of tax-exempt bonds. But he said the IRS has not yet determined how the BABs will be selected for audits.

Chamberlin made the remark at the National Association of Bond Lawyers’ Tax and Securities Law Institute after bond lawyers raised questions about why the “compliance check questionnaires” the IRS recently sent to BAB issuers asks whether they follow secondary market trading activity for their BABs after the sale date.

The four-page survey was sent to issuers beginning last week, but was not publicly released until late Thursday,

“Every single issuer of BABs, whether they issued one BAB or 10 BABs, they will get a questionnaire,” Chamberlin told the lawyers at the meeting.

The questionnaire asks issuers if they know whether information about the secondary market trading activity of their BABs is available through the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system.

It also asks if the issuer or a consultant, other than the underwriter or initial bond purchaser, reviewed secondary market activity after the sale date of the bonds but before the date of issue. Another question asks the issuer if it found that its bonds traded for a higher price before the issue date.

Those questions appear to be seeking information regarding “flipping,” which occurs when dealers or institutional investors purchase bonds and then immediately resell them to retail investors at a higher price.

But bond attorneys pointed out that, as far as the federal tax requirements are concerned, the issue price is determined once 10% of the bonds have been sold at that price.

“Generally, the issue price of bonds that are publicly offered is the first price at which a substantial amount of the bonds is sold to the public,” according to tax rules. “Ten percent is a substantial amount.”

Issuers need to know the issue price before all the bonds are sold so they can determine the bond yield, which is key to figuring out whether the issuer makes any arbitrage profits over the life of the bonds.

BAB issuers also need to know the issue price due to a special rule stating that BABs cannot include more than a de minimis amount of premium.

“We’re puzzled over why [the questionnaire asks] this,” Clifford Gerber, a partner with Sidley Austin LLP, said during a separate panel that did not include Chamberlin. “If you could properly rely on a certification that said they sold the first 10% of the bonds at par, does it matter legally where the rest of the bonds ... sold?”

Chamberlin had said on the earlier panel that the questions were included on the questionnaire to find out whether issuers are actually checking on what happens to their bonds after the sale date. The questionnaire also serves as a suggestion that, if issuers are not following their bonds, maybe they should be, he said.

“We can look at EMMA ourselves. We want to know what the issuers are doing,” he said. “We’ve put out some questions, but we’ve also given opportunities to get some written feedback.”

Bond attorneys pointed out that the vast majority of issuers, if answering honestly, would say they are not following the secondary market activity of their bonds, and wondered if such a response would spur the IRS to audit their BABs.

Though Chamberlin said pricing will be the focus of some upcoming audits, he did not indicate whether issuers who say they do not follow the bonds’ market activity should expect an audit.

“We will be sending out examinations and we will be sending out [information document requests] to specifically inquire about compliance with this requirement,” he said. “I can’t tell you right now that someone who answers 'no’ is or isn’t going to get selected for an audit. … We may just randomly pull [BABs to be audited], I honestly don’t know yet.”

The survey also asks BAB issuers whether they have written procedures in place to ensure compliance with federal requirements regarding: the timely expenditure of bond proceeds; the correct calculation of available project proceeds; the use of 100% of available project proceeds minus a reasonably required reserve fund to go to capital expenditures; arbitrage yield restriction and rebate; issuance costs that must not exceed 2% of proceeds; and the timely and accurate filings of Form 8038-CP, which BAB issuers send to the IRS to request a subsidy payment.

In addition, the questionnaire asks if issuers have written procedures in place to ensure any violations are quickly identified and corrected through remedial actions or the IRS’ Voluntary Closing Agreement Program.