The IRS Tax-Exempt Bond Voluntary Closing Agreement Program, known as TEB VCAP, lets a state or local bond issuer come forward about a federal tax law violation, pay a negotiated settlement, and sign a binding agreement that keeps the bonds’ interest excluded from bondholders’ gross income under 26 U.S.C. § 103.1Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds Without that agreement, an IRS examination could strip the bonds’ tax-exempt status retroactively and send bondholders a tax bill on interest they had treated as tax-free.
When VCAP Is the Right Tool
VCAP is not the only way to fix a tax problem with an outstanding bond issue, and it is not usually the first option to try. Treasury regulations already allow issuers to self-correct some violations without ever contacting the IRS. Under Treasury Regulation 1.141-12, an issuer whose “deliberate action” causes a governmental or qualified 501(c)(3) bond to fail the private business use tests can typically redeem or defease the nonqualified bonds within 90 days and avoid federal involvement.2Internal Revenue Service. TEB Self-Correction – Some Basic Concepts Some arbitrage problems can be cleared by filing Form 8038-T and making a yield reduction payment.
VCAP fills in where self-correction doesn’t reach: violations that fall outside the regulatory remedial provisions, or ones where the self-correction window has already closed.2Internal Revenue Service. TEB Self-Correction – Some Basic Concepts Self-correction is free but narrow and time-limited. VCAP costs a settlement payment but covers far more ground.
Who Is Eligible
VCAP is available to issuers of bonds that were intended to be tax-advantaged at issuance, including governmental bonds under Section 103, qualified 501(c)(3) bonds, tax credit bonds, and direct pay bonds such as Build America Bonds.3Internal Revenue Service. TEB Voluntary Closing Agreement Program Conduit borrowers, trustees, and other parties to the transaction can be included in the submission with the issuer.
The main gate is the under-examination rule. Once the IRS mails a letter opening an examination of a bond issue, that issue is off-limits to VCAP.4Internal Revenue Service. Internal Revenue Manual 7.2.3 – Tax Exempt Bonds Voluntary Closing Agreement Program The same applies if the bonds’ tax-advantaged status is already before the IRS Independent Office of Appeals or in a federal court. The IRS runs an audit-history check when the submission arrives and returns the package if the issue is in play elsewhere.
There is no statutory deadline for coming forward, but as explained below, waiting raises the price.
Violations the Program Covers
The IRS has published resolution standards for common categories of violations, which makes the settlement more predictable when a case fits one of them.4Internal Revenue Service. Internal Revenue Manual 7.2.3 – Tax Exempt Bonds Voluntary Closing Agreement Program These include excessive private business use, ownership problems with property financed by qualified 501(c)(3) bonds, failure to give the IRS notice of a defeasance escrow, defeased bonds that aren’t callable within 10.5 years, changes in use that cause non-AMT bonds to become AMT bonds, exceeding the $10,000,000 capital expenditure ceiling for small issue bonds, average maturity above 120% of the financed property’s average expected useful life, impermissible advance refundings, failure to reinvest escrow proceeds in State and Local Government Series Treasury securities, missing TEFRA public approval on private activity bonds, and failure to file required information returns after taking remedial action.
For direct pay bonds, eligible violations include excessive nonqualified use and de minimis premium violations on the issue date. Violations outside the published categories can still be submitted; the IRS handles them case by case.
How the Settlement Amount Is Calculated
The settlement has a floor of $2,500. Above the floor, the IRS generally bases the payment on the greater of $2,500 or “taxpayer exposure” on the nonqualified bonds, meaning the federal tax revenue lost because bondholders excluded interest on bonds that did not actually qualify for the exclusion.4Internal Revenue Service. Internal Revenue Manual 7.2.3 – Tax Exempt Bonds Voluntary Closing Agreement Program
The math starts with the “total nonqualified bonds,” the portion of the issue that would fail the tax-exempt tests as of the violation date. The IRS then calculates taxpayer exposure on those bonds from the violation date until the nonqualified bonds are redeemed, retired, or canceled. Adjustments can apply for alternative minimum tax, depreciation under Section 168(g), and interest deductions under Section 150(b).
Timing has a real dollar consequence. A VCAP request filed within six months of the deliberate action that caused the violation is settled at 100% of the computed base amount. Filed between six months and a year later, the settlement is 110% of the base amount. Some categories have their own flat amounts. Failure to give timely notice of a defeasance escrow, for example, resolves for $2,500 if submitted within six calendar months and doubles if submitted between six and twelve.
Settlement is not always the whole picture. Some violations, notably excessive private use, also require the issuer to redeem, retire, and cancel the nonqualified bonds as part of the resolution.
Putting Together the Submission
The submission is built around Form 14429. Incomplete packages get sent back without review, so it pays to be exhaustive the first time.5Internal Revenue Service. Form 14429 – Tax Exempt Bonds Voluntary Closing Agreement Program Request
Issuer, Party, and Bond Information
Form 14429 asks for the issuer’s name, EIN, and address, plus the original name and EIN if either has changed since the Form 8038 series return was filed. Each additional party, such as a conduit borrower or trustee, needs to be identified with its role, along with Form 8821 (Tax Information Authorization) for that party and Form 2848 (Power of Attorney) for any authorized representatives.
Bond-level fields include the issue name, issue date, CUSIP if any, and issue price. Attach a full debt service schedule showing principal maturities and interest rates. For variable rate bonds, describe how the rate is set and list interest payments through the request date. Include a copy of the Form 8038 or 8038-G filed at issuance.
Violation Narrative and Proposed Terms
The heart of the submission is a written description of what went wrong: the Internal Revenue Code sections at issue, the facts and circumstances of the violation, and when and how the issuer discovered it. The issuer must also propose the settlement itself, including a computation of the payment amount (using the IRM 4.81.6 methodology or an alternative), the source of funds, and a draft closing agreement based on the VCAP model. Attach the trust indenture, tax certificate, and other bond documents so the specialist has context.
Form 14429 also requires signed declarations that the bond issue is not under examination, not before Appeals, and not in federal court.
Submission and Review
Requests can be emailed to TEBVCAP@irs.gov or mailed to the IRS at the FAST unit in Ogden, Utah.4Internal Revenue Service. Internal Revenue Manual 7.2.3 – Tax Exempt Bonds Voluntary Closing Agreement Program After the audit-history check, the case is assigned to a specialist within TEB Technical. The IRS does not publish a guaranteed processing time, and review commonly runs several months depending on complexity and workload.
The specialist reviews the narrative, tests the settlement computation against the resolution standards in IRM 7.2.3.4, and asks for anything missing. Negotiation is common, especially when the violation doesn’t map cleanly onto a published standard or when the IRS disagrees with the issuer’s math. While a case is open in VCAP, the IRS generally will not start an audit on the same bond issue, though a case that has already been through VCAP can still be picked up for audit later.
The Closing Agreement
When both sides agree on terms, the resolution is memorialized as a closing agreement under 26 U.S.C. § 7121, a binding contract between the issuer and the IRS.6Office of the Law Revision Counsel. 26 USC 7121 – Closing Agreements Once approved, it cannot be reopened or modified by any IRS officer, employee, or agent except on a showing of fraud, malfeasance, or misrepresentation of a material fact.
Before the IRS signs, the issuer submits the settlement payment through the Electronic Federal Tax Payment System (EFTPS) under the issuer’s EIN and returns the executed copies to the specialist. The Field Agent Support Team confirms receipt of the EFTPS payment, and the IRS then countersigns.
The executed agreement preserves the bonds’ tax-exempt status for the rest of the issue’s life. Bondholders continue to exclude interest from gross income notwithstanding the identified violation. The agreement may also commit the issuer to specific corrective actions or ongoing compliance monitoring, and it should live permanently in the post-issuance compliance file.
Testing the Waters: Anonymous Requests
If the violation is unusual or the published standards don’t obviously apply, the issuer can submit an anonymous request describing the facts without naming the bond issue.4Internal Revenue Service. Internal Revenue Manual 7.2.3 – Tax Exempt Bonds Voluntary Closing Agreement Program A Tax Law Specialist analyzes the scenario and responds in writing with either a likely resolution approach or an explanation that the situation falls outside VCAP.
The limits are real. Because the bonds aren’t identified, the anonymous request does not stop the IRS from opening an audit on the actual issue in the meantime. If the eventual full submission reveals more serious or additional violations than the anonymous facts described, the IRS gives its earlier response no weight. Fact patterns that are too specific, or where a written response wouldn’t serve tax administration, won’t be answered. The option works best for genuinely ambiguous situations, not as a stall.
What Happens if the Issuer Does Nothing
Leaving a known violation unresolved is the highest-risk path. Without VCAP or successful self-remediation, the bond issue is exposed to a full examination, and an adverse determination can strip the bonds’ tax-exempt status retroactively. Bondholders who had excluded the interest could owe back taxes, the bonds’ market value drops, and the issuer’s standing in the municipal market suffers.
VCAP can also fail on its own terms. If negotiations break down and the specialist closes the case as unresolved, the IRS considers referring the issue for a formal audit, and the information the issuer already disclosed does not go away.4Internal Revenue Service. Internal Revenue Manual 7.2.3 – Tax Exempt Bonds Voluntary Closing Agreement Program That outcome is uncommon when the issuer submits a thorough package and proposes reasonable terms, but the risk is a good argument for doing the initial work carefully rather than testing the specialist with a thin filing.