IRS readies electronic filing of Form 8038-CP

The Internal Revenue Service has revised its Form 8038-CP to facilitate electronic filing, which will be out later this year.

“The January 2022 revisions simplifies the filing process for issuers when providing certain explanations and supplemental information,” the IRS said in an instructional video introducing the new form. “Additionally, revisions to the form were needed to facilitate electronic filing which is planned for later in 2022.”

The IRS announced it was moving to mandatory electronic filing and a newly revised Form 8038-CP back in October and it has been one of the most anticipated events coming out of the IRS to start the year. The revised form is a step in addressing the massive backlog of paper Form 8038-CPs that were built up as a result of COVID-19 related shutdowns.

“They were among the forms that probably experienced the biggest backlog because certainly a number of other forms are able to be processed electronically, particularly for refunds,” Marybeth Orsini, partner at Ballard Spahr said. “Refunds [like 1040] were available and somewhat delayed but the 8038-CP refunds were significantly delayed.”

“I think electronic filing, when it finally gets here, is going to be great for issuers, to expedite the turnaround process,” she added. “The changes appeared to be largely in the nature of having additional codes that will track bonds in order to allow the IRS to associate future returns all for the same bond issued together.”

The revised form has an effective date provision based on processing of the form, therefore issuers should use the January 2022 revision of Form 8038-CP.

But one of the most significant changes is also the new Schedule A, which doesn’t apply to Build America Bonds or recovery zone economic development bonds.

“The most noticeable change to the Form 8038-CP is the new Schedule A,” the IRS said. “The new schedule will simplify and increase accuracy for claims with respect to specified tax credit bonds.Specified tax credit bonds reported on Schedule A are new clean renewable energy bonds, qualified energy conservation bonds, qualified zone academy bonds and qualified school construction bonds.”

Under Internal Revenue Code Section 6431, computation of the refundable credit payment for specified tax credit bonds must be done on a bond-by-bond basis, the IRS said.

“The allowable credit payment is the lesser of the interest payable on the bond or the interest that would’ve been payable had the bond paid interest at the applicable credit rate, or in the case of new clean renewable energy bonds and qualified energy conservation bonds, 70% of the applicable credit rate.”

As a result, for specified tax credit bond issues which include several different bonds in a single bond issue, a separate computation is required for each individual bond and for bonds with the same maturity but different terms such as different interest rates.

This differs from the credit payment amount for Build America Bonds and recovery zone economic development bonds, where credit payments are based on a uniform percentage of the interest paid on every bond in the issue. Therefore filers of either of those bonds will not use Schedule A.

Issuers of new clean renewable energy bonds and qualified energy conservation bonds using the January 2022 revision are no longer required to file separate Form 8038-CPs, as they were required to under the previously revised January 2020 form.

But separate filings of Form 8038-CP payment requests continue to be required for different types of bonds such as Build America Bonds and recovery zone economic development bonds, even though the bond may be part of the same issue for most other tax purposes.

An important change for all filers is the report number on the return. “For January 2022 and later filings, issuers are now required to assign a report number for the filing and to use the same report number when filing to claim credit for the bonds for subsequent interest payment dates.”

If the bond issue consists of fixed-rate bonds and variable-rate bonds, where the issuer doesn’t know the interest amount to be paid before 45 days prior to the interest payment date, separate Form 8038-CPs are filed for the fixed-rate bonds and the variable rate bonds.

“Previously, the IRS assigned different report numbers to those different returns. With the January 2022 revision, issuers must assign different report numbers for the separate filings,” the IRS said.

Issuers then assign a report number in the range between 401-450. “When filing for more than one type of bond or when filing multiple returns for the same issue, the separate Form 8038-CP payment requests should have report numbers numbered consecutively starting with 401,” the IRS said.

Four new categories to enter code numbers are in the revised January 2022 form in order to facilitate faster filing. The code numbers are 102 for clean renewable energy bonds; 103 for qualified energy conservation bonds; 104 for qualified zone academy bonds; 105 for qualified school construction bonds; 109 for Build America Bonds and 110 for recovery zone economic development bonds.

“An amended Form 8038-CP return can only be filed if you are filing to correct errors in Part III on a previously filed final return.”

“If it’s not a final return, don’t amend it. Instead you should make the adjustments on a subsequently filed return.”

With the new form, you’ll have to enter a 3-digit code for explanation. 211 is for erroneous entry on prior return typographical or input error or incorrect debt service schedule date used; 212 for math error on prior return; 213 for claimed interest on prior return on bonds previously redeemed; 214 for claimed interest on prior return on bonds through previously legally defeased and 219 for other.