Reporting Tax-Exempt Interest

In May 2006, the Internal Revenue Service (“IRS”) passed the Tax Increase Prevention and Reconciliation Act of 2005 (the “Act”).  The Act makes it a requirement to report to the IRS all payments to bond holders of tax-exempt interest earned in a calendar year.  This requirement is effective for all tax-exempt interest paid in calendar year 2006 and every year thereafter.  The passage of the Act does not mean that the tax-exempt status of the bonds has changed.  It simply means that tax-exempt interest must be reported to the IRS the same way taxable interest is reported.

Most bond issues have a financial institution serving as Registrar and Paying Agent whose primary role is to facilitate the payment of interest and principal to bondholders.  The Registrar and Paying Agent, as part of their duties, should also report to the IRS all payments of tax-exempt interest to bondholders. In addition, many bond issues are registered with the Depository Trust Company (“DTC”).  DTC will comply with the reporting requirements mandated by the Act for bonds that are registered with them, including bond issues that have a Registrar and Paying Agent.  We would suggest contacting your Registrar and Paying Agent for all outstanding bonds to confirm that the tax-exempt interest reporting requirements are being satisfied.

For bond issues that do not have a Registrar and Paying Agent and are not registered with DTC, the issuer is responsible for complying with the IRS reporting requirements.  This includes providing a Form 1099-INT to bondholders showing the amount of tax-exempt interest received during a given calendar year.  Please contact your bond counsel or email us at footnotes@umbaugh.com if you have questions relating to this matter or if we can be of any assistance.