Everything you need to know about changes to Form 8038-CP reporting

April 1, 2024

New IRS regulations are forcing issuers of some qualified municipal bonds to change how they claim federal subsidies. Learn how municipalities can navigate the new rules to stay compliant and receive their credit payments.

For years, state and local governments have had to file Form 8038-CP to claim payments relating to interest on qualified bonds. Many have been filing electronically with the IRS all along. Only now it’s not just a matter of preference.

It’s the law.

On Jan. 1, 2024, the IRS began requiring bond issuers that file 10 or more tax forms in a calendar year to electronically file Form 8038-CP to claim their federal subsidies. While this is a relatively minor adjustment to an established process, it could have major financial implications for municipalities that fail to comply with the new digital filing requirement.

“Regulations are constantly changing, so it’s important that bond issuers know going forward that filing electronically is required if the issuer files more than 10 documents with the IRS,” says Kelli Lambrix, vice president and Corporate Trust manager at U.S. Bank. “The form hasn’t changed. The timing hasn’t changed. It’s the method that’s changed.”

To ensure compliance and optimize tax subsidies, there are a few things you should know.

Digital filing impacts to qualified infrastructure bonds

Municipalities including states, counties, cities, school districts and other local governments can raise funds from private investors to finance infrastructure and economic development projects by issuing tax-exempt bonds that benefit the public, such as highways, hospitals and schools. The municipalities agree to repay the principal with interest over a set period of time.

During the Great Recession, with many municipalities struggling to fund capital projects, economic recovery laws were enacted to offset borrowing costs through certain qualified bonds, such as:

  • Build America bonds (BABs)
  • Recovery zone economic development bonds (RZEDBs)
  • Qualified school construction bonds (QSCBs)
  • Qualified zone academy bonds (QZABs)
  • New clean renewable energy bonds (NCREBs)
  • Qualified energy conservation bonds (QECBs)

Many of these qualified bonds were issued when Congress passed legislation in 2009 to stimulate the economy following the financial crisis. Instead of exempting interest on the bonds from federal income taxes, the U.S. government subsidizes a percentage of the interest directly to the issuer for these qualified bonds.

The timeline for filing Form 8038-CP is 45-90 days prior to interest payments for the municipality to receive its subsidy. However, the IRS is no longer accepting paper filings or PDF attachments to fulfill compliance.

The drive to digital filing

Form 8038-CP provides the IRS with information on the interest that was paid for a specific payment date and the amount the federal government is due to credit the issuer as the offsetting subsidy. Accurate and timely filing is essential for issuers to avoid any delay in receiving their subsidies.

The IRS’s push to increase online reporting means most municipalities must now file Form 8038-CP online through one of two authorized e-file providers. The change is part of the agency’s effort to modernize its filing system after COVID-19 shutdowns and mail disruptions caused large backlogs. 

Who’s authorized to electronically file Form 8038-CP?

New claims must be filed electronically with the IRS through one of two authorized e-file providers – Oltpro or Tax990. This includes most municipalities that file 10 or more tax forms a year, including W2s, Forms 1099, income, employment and excise tax returns.

After years of fulfilling reporting requirements for their clients for free or for a fee, many banks are opting not to perform this service under the new regulations. U.S. Bank continues to help customers stay compliant by partnering with one of the approved e-file providers to ensure all Form 8038-CP filings comply with the IRS’s new requirement. This continues to provide our customers with filing services and peace of mind.

“Our commitment to innovation includes simplifying compliance with the IRS’s latest regulation for our clients, ensuring they can seamlessly maintain their eligibility for crucial subsidies they rely on,” Lambrix adds.

The value of partnership

Municipal bond offerings are an important element to the growth and future of communities. But it takes meticulous and transparent accounting to comply with the evolving tax laws that govern these essential financing tools.

Our knowledgeable team can provide guidance to help you successfully execute transactions and expertise to help you achieve your long-term goals.

For more information about our corporate and municipal services, contact us or visit our website.

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