Form 8038-T: Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate

Form 8038-T: Arbitrage Rebate, Yield Reduction, and Penalty in Lieu of Arbitrage Rebate

Form 8038-T is a crucial IRS form used by issuers of tax-exempt bonds to report arbitrage rebate, yield reduction, and penalties that may arise in lieu of paying arbitrage rebate. This form ensures compliance with the arbitrage rebate rules under the Internal Revenue Code (IRC) and provides the IRS with necessary details about bond issues that involve arbitrage, a practice where bond proceeds are invested at a higher yield than the bond’s tax-exempt yield.

In this guide, we will explain what Form 8038-T is, the situations when it is required, and how to file it properly.

What is Form 8038-T?

Form 8038-T is an IRS form used by issuers of tax-exempt bonds to report certain payments related to arbitrage rebate, yield reduction, and penalties in lieu of arbitrage rebate. These payments are necessary when bond proceeds are invested at a higher yield than the bonds’ tax-exempt yield.

The form specifically covers:

1. Arbitrage Rebate Payments: When an issuer of tax-exempt bonds earns a higher yield from investing bond proceeds than the bond’s tax-exempt yield, they may need to pay the arbitrage rebate to the IRS.

2. Yield Reduction Payments: If the issuer of tax-exempt bonds fails to meet the arbitrage rebate requirements, they may opt for yield reduction. This involves reducing the bond’s yield to meet the IRS guidelines and avoid rebate payments.

3. Penalty in Lieu of Arbitrage Rebate: In some situations, a bond issuer may be allowed to make a penalty payment instead of paying the arbitrage rebate. This penalty is a fixed amount based on the bond’s yield and may be chosen when the issuer cannot calculate the arbitrage rebate accurately.

The purpose of Form 8038-T is to report all payments related to these issues and to certify that the issuer is in compliance with IRS regulations related to tax-exempt bonds.

Who Must File Form 8038-T?

Form 8038-T must be filed by the issuer of tax-exempt bonds that involve arbitrage rebate, yield reduction, or penalties. This typically includes:

1. State and Local Governments:

   • These entities often issue tax-exempt bonds for public infrastructure projects or other governmental purposes and must ensure compliance with arbitrage rebate rules.

2. Qualified Bond Issuers:

   • Any issuer that issues private activity bonds, qualified 501(c)(3) bonds, or other bonds subject to the arbitrage rules must file Form 8038-T when making a reduction or payment to meet compliance.

3. Bond Issues Subject to Arbitrage Rebate:

   • If a bond issue is subject to arbitrage rebate provisions and the issuer opts to make a yield reduction payment or penalty payment, Form 8038-T must be filed to report these payments.

When is Form 8038-T Due?

The filing deadline for Form 8038-T depends on the bond’s arbitrage rebate payment schedule. Generally, Form 8038-T must be filed with the IRS on the due date of the final rebate payment. In practice, this means:

1. Deadline for Final Rebate Payment:

   • If the bond issue is subject to rebate, Form 8038-T should be filed when the final arbitrage rebate payment is made to the IRS.

2. Payment Deadline:

   • The final arbitrage rebate payment is typically due 60 days after the end of the fifth bond year. Issuers must calculate their arbitrage rebate liabilities and pay the correct amount within the designated timeframe.

3. Yield Reduction and Penalty Payments:

   • If an issuer opts for a yield reduction or penalty payment in lieu of arbitrage rebate, Form 8038-T must be filed within the same timeframe as the rebate payment to report the amount of payment.

4. Filing Deadline:

   • The filing deadline for Form 8038-T is the same as the payment deadline. If the rebate payment is due on May 15th, Form 8038-T must be submitted to the IRS by that date.

Key Information Required on Form 8038-T

When filing Form 8038-T, the issuer must provide various details about the bond issue and the payments being made. Below are the key pieces of information required:

1. Issuer Information:

   • Name of Issuer: The name of the entity issuing the bonds.
   • Employer Identification Number (EIN): The unique number assigned to the issuer by the IRS.
   • Issuer’s Address: The address of the issuer, including city, state, and ZIP code.
   • Contact Person: The name and contact details of the person responsible for filing the form.

2. Bond Issue Information:

   • Name of Bond Issue: The name of the specific bond issue.
   • Date of Issuance: The date when the bonds were issued.
   • Bond Yield: The yield on the bonds at the time of issuance.
   • Bond Type: The type of bond issue (e.g., general obligation bonds, private activity bonds, etc.).

3. Rebate Payment Information:

   • Arbitrage Rebate Amount: The amount of arbitrage rebate to be paid for the bond issue.
   • Yield Reduction Payment: If the issuer is opting for yield reduction, the amount of yield reduction payment made instead of the rebate.
   • Penalty in Lieu of Rebate: If the issuer chooses to pay a penalty instead of making an arbitrage rebate payment, the amount of the penalty.

4. Calculation Information:

   • Rebate Calculation: The form may require a detailed breakdown of how the rebate, yield reduction, or penalty amount was calculated, including applicable interest rates and the time periods involved.

5. Payment Information:

   • Date of Payment: The date on which the rebate or penalty payment was made to the IRS.
   • Amount Paid: The total amount paid, whether it is for arbitrage rebate, yield reduction, or penalty.

6. Miscellaneous Information:

   • Affirmation of Compliance: The issuer must affirm that all payments are in compliance with IRS regulations related to arbitrage rebate, yield reduction, and penalties.

Filing and Submission Process

1. Prepare the Necessary Information:

   • Gather all relevant documents and data, including the bond’s yield, the final rebate calculation, and the payment amounts made for arbitrage rebate, yield reduction, or penalties.

2. Complete the Form:

   • Fill out Form 8038-T with the required details. Make sure all information is accurate and consistent with the calculations.

3. Submit the Form:

   • Form 8038-T must be submitted by mail to the IRS. The appropriate address for submission is provided in the form’s instructions.

4. Record Keeping:

   • Retain a copy of the form and all supporting documentation for your records. This is important in case the IRS requests additional information or if the issuer is selected for an audit.

Penalties for Non-Filing or Incorrect Filing

1. Late Filing Penalties:

   • Failure to file Form 8038-T on time can result in a penalty of $25 per day for each day the form is late, up to a maximum of $1,000.

2. Incorrect Information:

   • Providing incorrect or incomplete information on Form 8038-T can lead to delays in processing, possible audits, and penalties for non-compliance.

Conclusion

Form 8038-T is essential for issuers of tax-exempt bonds who need to report arbitrage rebate, yield reduction, or penalties related to bond issues. By properly filing this form, issuers ensure compliance with IRS regulations and can avoid penalties or issues related to overpayment or underpayment of rebate amounts.