IRS May Investigate Municipal Bond Sales

The Internal Revenue Service is considering launching another probe into the way investment firms have managed municipal bond sales for governmental entities.

An investigation into “yield-burning”--which allegedly occurred when municipal issuers attempted to refinance their debt with lower rates--would deal with bond sales from 1995 forward.

Yield-burning occurs when bankers excessively mark up the prices of Treasury securities they sell to municipal bond issuers to help refinance outstanding debt.

The inflated price “burns” down the securities’ yield to give the appearance of compliance with strict tax law while also earning fat profits for the securities firms.