What Is Form 8038-T and How to File It?

Issuers of tax-exempt bonds, such as state and local governments, use Form 8038-T, Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate, as a transmittal document. It accompanies specific payments made to the Internal Revenue Service (IRS) that are required under federal tax law. The form ensures that issuers comply with regulations designed to prevent the misuse of the tax-exempt status of their bonds. It provides the IRS with the necessary details to identify the bond issue and the nature of the payment.

Understanding the Required Payments

The reason for filing Form 8038-T stems from the arbitrage rules in Section 148 of the Internal Revenue Code. Arbitrage is the profit an issuer earns by investing the proceeds from a tax-exempt bond issue in higher-yielding taxable securities. Because the issuer borrows money at a low, tax-exempt interest rate and invests it at a higher, taxable rate, it can generate a profit. Federal regulations require that these arbitrage profits be paid to the U.S. Treasury to prevent issuers from issuing more bonds than necessary to earn investment profits.

An arbitrage rebate payment is the most common remittance sent with Form 8038-T. The calculation determines the amount by which investment earnings exceed what would have been earned if the proceeds were invested at a yield equal to the bond’s own yield. The first installment payment is due within 60 days after the end of the fifth bond year. Subsequent payments are required at least every five years thereafter.

A second type of payment is a yield reduction payment. This payment is made to retroactively lower the yield on an investment made at a rate higher than permitted. If an issuer discovers that bond proceeds were invested in a way that violates yield restriction rules, making this payment to the IRS can correct the non-compliance. This payment reduces the investment’s return to a compliant level and serves as a corrective measure.

The third payment type is a penalty in lieu of rebate. For certain bonds, primarily those funding construction projects, an issuer can elect on or before the issue date to pay a penalty instead of remitting an arbitrage rebate. This election requires the issuer to pay a 1.5% penalty on any bond proceeds not spent according to a prescribed schedule, measured at 6-month, 18-month, and 24-month intervals. These penalty payments must be paid within 90 days of the end of the applicable spending period.

Information and Calculations for Form 8038-T

To complete Form 8038-T, an issuer must gather specific information for accurate reporting. The form requires basic issuer details, including its name, address, and Employer Identification Number (EIN). Information specific to the bond issue is also needed, such as the issue’s CUSIP number, the original issue date, and the total issue price of the bonds.

The official Form 8038-T and its instructions are available on the IRS website. Issuers should download the most current version from IRS.gov/Form8038T to ensure they are using the correct revision and have the latest guidance.

Part I of the form captures the issuer’s identifying information and the bond details. Part II requires the filer to check a box for the payment type and enter the amount on the correct line, such as line 13 for an arbitrage rebate or line 14 for a yield reduction payment. If a penalty in lieu of rebate is being paid, Part III must be completed to provide details about the spending periods.

For an arbitrage rebate, the calculation involves tracking all investment earnings on gross bond proceeds and comparing them to the hypothetical earnings at the bond’s yield. This complex calculation, performed by a specialized rebate analyst, determines the future value of the excess earnings, which becomes the rebate amount due. At least 90% of the accrued rebate must be paid with the first installment.

Filing and Submitting Form 8038-T

The form and the accompanying payment cannot be filed electronically and must be mailed to the Department of the Treasury, Internal Revenue Service, Ogden, UT 84201-0027. Issuers may also use certain private delivery services approved by the IRS, but should consult the agency’s list for the appropriate street address.

Payment must be a check or money order for the total amount due, made payable to the “United States Treasury.” To ensure the payment is properly credited, the check or money order should include the issuer’s name, address, EIN, “Form 8038-T,” and the date.

The IRS does not acknowledge the filing of this form or send a receipt. For this reason, issuers should maintain thorough records for proof of compliance in case of a future IRS examination. These records should include a copy of the completed Form 8038-T, proof of mailing like a certified mail receipt, and a copy of the cleared check.