Instructions for Form 8038-T

(Rev. October 2021)

Arbitrage Rebate, Yield Reduction, and Penalty in Lieu of Arbitrage Rebate

Department of the Treasury

Internal Revenue Service

Section references are to the Internal Revenue 

Code unless otherwise noted.

Future Developments

For the latest information about 

developments related to Form 8038-T and 

its instructions, such as legislation 

enacted after they were published, go to 

IRS.gov/Form8038T.

General Instructions

Purpose of Form

Under section 148(f), interest on a state or 

local bond is not tax-exempt unless the 

issuer of the bond rebates to the United 

States arbitrage profits earned from 

investing proceeds of the bond in higher 

yielding nonpurpose investments. Issuers 

of tax-exempt bonds and any other bonds 

subject to the provisions of section 148 

must use this form to make arbitrage 

rebate and related payments.

Mortgage revenue bonds. Section 

143(g)(3) provides special arbitrage 

rebate rules for qualified mortgage bonds 

and qualified veterans' mortgage bonds. 

Under these special rules, issuers may 

pay the rebate either to mortgagors, or if 

an election is made before issuance of the 

bond, to the United States. Use this form 

only if you have elected to pay the rebate 

to the United States.

Qualified Zone Academy Bonds 

(QZABs) issued under section 1397E. 

A QZAB is a bond issued by a state or 

local government to finance certain 

eligible public school purposes. An issuer 

of QZABs issued under section 1397E or 

section 54E, if applicable, may establish a 

defeasance escrow to cure a failure to 

properly use QZAB proceeds. An issuer 

must pay any investment earnings on 

amounts in the defeasance escrow that 

are in excess of the yield on the issue. In 

determining the yield on the issue, the 

credit allowed is disregarded. Use this 

form to make payments of investment 

earnings on amounts in defeasance 

escrows. See Regulations section 

1.1397E-1(h)(8)(ii)(C).

Note. Use a separate Form 8038-T for 

each issue.

Who Must File

Issuers of tax-exempt bonds and any 

other bonds subject to the provisions of 

section 148 must file Form 8038-T to pay:

1. Arbitrage rebate.

2. Yield reduction payments.

3. The penalty:

• In lieu of arbitrage rebate; or

• To terminate the election to pay a 

penalty in lieu of arbitrage rebate.

4. Penalties and interest on the failure to 

pay on time any amounts in 1-3 

above.

Issuers of QZABs issued under section 

1397E or section 54E, as applicable, that 

establish a defeasance escrow under the 

Regulations must file Form 8038-T to pay 

100% of the investment earnings on 

amounts in the defeasance escrow.

Applicable Regulations

General

Unless otherwise stated, regulation 

sections referenced in these instructions 

are to the 1993 regulations, as amended. 

Generally, an issuer may apply these 

regulations to bonds that are outstanding 

on July 8, 1997. For the 1993 regulations, 

see T.D. 8476, 1993-2 C.B. 13, and T.D. 

8538, 1994-1 C.B. 26. For the 1997 

amendments to the 1993 regulations, see 

T.D. 8718, 1997-1 C.B. 47. The 1992 

regulations generally apply to bonds 

issued before July 1, 1993. For the 1992 

regulations, see T.D. 8418, 1992-1 C.B. 

29.

Special Rules

For rules on computing the arbitrage 

rebate for mortgage revenue bonds, see 

Temporary Regulations section 

6a.103A-2(i)(4).

For rules on computing the arbitrage 

rebate for bonds subject to section 103(c)

(6)(D) of the 1954 Code, see Temporary 

Regulations section 1.103-15AT, T.D. 

8005, 1985-1 C.B. 39, if the issuer has not 

applied the later regulations.

For QZABs issued under section 

1397E and section 54E, see Regulations 

T.D. 9495.

Arbitrage Rebate

Computation of Arbitrage Rebate

The rebate amount for an issue is based 

on the difference between the amount 

actually earned on nonpurpose 

investments and the amount that would 

have been earned if those investments 

had a yield equal to the yield on the issue.

Note. Regulations section 1.148-3(b) 

provides that as of any date, the rebate 

amount for an issue is the excess of the 

future value, as of that date, of all receipts 

on nonpurpose investments over the 

future value, as of that date, of all 

payments on nonpurpose investments. 

The definitions of payments and receipts 

in Regulations section 1.148-3(d), in part, 

require inclusion of transactions 

(including, but not limited to, acquisition, 

earnings, and return of principal) on a date 

for each nonpurpose investment. Any 

cash flow representation to the contrary 

may result in the understatement of rebate 

amount. Yield reduction payments are 

determined using payments and receipts 

as described in Regulations section 

1.148-5(b)(1).

Exceptions

A number of exceptions may relieve an 

issuer of the rebate requirement for all or a 

part of an issue of bonds.

Note. The following exceptions may 

apply only to a portion of an issue. In such 

cases, the rebate requirement continues 

to apply to the portion of the issue not 

covered by the exception.

Small issuer exception. The rebate 

requirement does not apply to certain 

bonds issued by governmental units 

issuing no more than $5 million of bonds in 

a calendar year.

The exception is modified as follows: a 

governmental unit may issue up to $10 

million in bonds after 1997 ($15 million 

after 2001) per calendar year, provided no 

more than $5 million of proceeds are used 

to finance expenditures other than public 

school capital expenditures. See section 

148(f)(4)(D) and Regulations section 

1.148-8.

6-month exception. The rebate 

requirement is considered to be met for 

gross proceeds of an issue (as defined in 

Regulations section 1.148-7(c)(3)) if those 

gross proceeds are spent within 6 months 

of the issue date. The 6-month exception 

is the only exception available for 

refunding issues.

See section 148(f)(4)(B) and 

Regulations section 1.148-7(a)–(c).

18-month exception. The rebate 

requirement is considered to be met for 

gross proceeds of an issue if those gross 

proceeds are spent according to an 

Oct 06, 2021 Cat. No. 30066E
18-month expenditure schedule measured 

from the issue date.

See Regulations section 1.148-7(a), 

(b), and (d).

2-year exception. The “available 

construction proceeds” of a construction 

issue are treated as meeting the rebate 

requirement if those proceeds are spent in 

accordance with a 2-year expenditure 

schedule measured from the issue date.

See section 148(f)(4)(C) and 

Regulations section 1.148-7(a), (b), and 

(e)–(j).

Exception for certain investments. The 

rebate requirement generally does not 

apply to gross proceeds that are invested 

in certain tax-exempt bonds, certain 

tax-exempt mutual funds, or certain 

demand deposit securities purchased 

directly from the United States Treasury.

Penalty in Lieu of Arbitrage 

Rebate

Penalty. An issuer may elect to pay a 

penalty in lieu of rebating arbitrage for the 

available construction proceeds of an 

issue if the spending requirements of the 

2-year exception are not satisfied. The 

penalty is equal to 11/2% of the amount of 

the available construction proceeds that 

do not meet the spending requirements.

See section 148(f)(4)(C)(vii) and 

Regulations section 1.148-7(k).

Election to terminate 11/2% penalty. An 

issuer may terminate the election to pay 

penalty in lieu of arbitrage rebate by 

paying an amount equal to 3% of the 

unspent available construction proceeds 

multiplied by the number of years in the 

initial temporary period. The termination 

election also requires other actions, such 

as yield restricting the unspent proceeds 

and using such proceeds to redeem 

bonds.

See Code section 148(f)(4)(C)(viii) and 

(ix) and Regulations section 1.148-7(l).

Yield Reduction Payments

Bond proceeds may be invested in higher 

yielding investments only during a 

temporary period described in Regulations 

section 1.148-2(e). After expiration of an 

applicable temporary period, proceeds 

must be yield restricted.

One method of complying with the yield 

restriction requirement is to make “yield 

reduction payments.” For certain 

investments, a yield reduction payment is 

taken into account in computing the yield 

on that investment. See Regulations 

section 1.148-5(c).

For investments with excess yield that 

are not eligible for yield reduction 

payments (such as an incorrectly invested 

advance refunding escrow fund), see 

Notice 2008-31, Voluntary Closing 

Agreement Program for Tax-Exempt 

Bonds and Tax Credit Bonds.

Where To File

File Form 8038-T and any attachments at 

the following address.

Department of the Treasury

Internal Revenue Service Center

Ogden, UT 84201–0027

Private delivery services. You can use 

certain private delivery services (PDS) 

designated by the IRS to meet the “timely 

mailing as timely filing/paying” rule for tax 

returns and payments. Go to IRS.gov/PDS 

for the current list of designated services.

The PDS can tell you how to get written 

proof of the mailing date.

For the IRS mailing address to use if 

you’re using PDS, go to IRS.gov/

PDSstreetAddresses.

PDS can’t deliver items to P.O. 

boxes. You must use the U.S. 

Postal Service to mail any item to 

an IRS P.O. box address.

When To File

Arbitrage rebate. An issuer must pay 

rebate in installments for computation 

dates that occur at least once every 5 

years. Rebate payments are due within 60 

days after each computation date. The 

final rebate payment for an issue is due 

within 60 days after the issue is 

discharged.

See Regulations section 1.148-3(e) 

through (g).

Special rules. For an issue retired 

within 3 years of issuance, the final rebate 

payment need not occur before the end of 

8 months after the issue date or during the 

period the issuer expects to meet any of 

the spending exceptions under 

Regulations section 1.148-7.

For rules concerning qualified 

mortgage bonds and qualified veterans' 

mortgage bonds see section 143(g)(3).

Penalty in lieu of arbitrage rebate and 

termination penalty. Penalty in lieu of 

arbitrage rebate payments must be paid 

within 90 days of the end of the applicable 

spending period.

Payment of the 3% penalty to terminate 

the penalty in lieu of arbitrage rebate 

election must be made within 90 days of 

(a) the end of the initial temporary period if 

the termination election was made under 

section 148(f)(4)(C)(viii), or (b) the date of 

the termination election if it was made 

under section 148(f)(4)(C)(ix).

Yield reduction payments. Yield 

reduction payments are payable at the 

same time as arbitrage rebate payments.

See Regulations section 1.148-5(c)(2).

CAUTION

!

QZABs. The issuer must pay 100% of the 

investment earnings on amounts in a 

defeasance escrow established for an 

issue of QZABs under section 1397E or 

section 54E, as applicable, at the same 

time and in the same manner as arbitrage 

rebate payments.

Failure To Pay Timely

In general, a failure to pay the required 

amounts of arbitrage rebate, yield 

reduction, or penalty payments on time 

may cause bonds to be treated as not 

being, and as never having been, 

tax-exempt.

If the failure is not due to willful neglect, 

the failure will be disregarded if the issuer 

promptly pays a penalty to the United 

States.

For governmental and qualified 501(c)

(3) bonds, the penalty equals 50% of the 

rebate amount not paid when required to 

be paid, plus interest on that amount. 

Otherwise, the penalty equals 100% of the 

rebate amount not paid when required to 

be paid, plus interest on that amount.

The penalty is generally waived if the 

rebate amount plus interest is paid within 

180 days of discovery of the failure. See 

Regulations section 1.148-3(h) and Rev. 

Proc. 2005-40, 2005-2 C.B. 83.

For issues to which the 1992 

Regulations apply, see 1992 Regulations 

section 1.148-1(c) for rules relating to 

innocent failure, willful neglect, 

computation of the correction amount, and 

penalty and interest. In general, these 

rules also apply to the Penalty in Lieu of 

Arbitrage Rebate and the Termination 

Penalty. See 1992 Regulations section 

1.148-6(n)(4).

Recovery of Overpayment

In general, an issuer may recover an 

overpayment for an issue of tax-exempt 

bonds by establishing to the IRS that an 

overpayment occurred. Payments that 

may be recovered include:

• Arbitrage rebate,

• Yield reduction,

• Penalty in lieu of arbitrage rebate, and

• Penalty to terminate penalty in lieu of 

arbitrage rebate.

See Regulations section 1.148-3(i) and 

Form 8038-R, Request for Recovery of 

Overpayments Under Arbitrage Rebate 

Provisions.

Specific Instructions

Part I—Reporting Authority

Amended return. An issuer may file an 

amended return to change or add to the 

information reported on a previously filed 

return for the same date of issue. If you 

are filing to correct errors or change a 

-2- Instructions for Form 8038-T (Rev. 10-2021)
previously filed return, check the 

“Amended Return” box in the heading of 

the form.

The amended return must provide all 

the information reported on the original 

return, in addition to the new or corrected 

information. Attach an explanation of the 

reason for the amended return.

Lines 1–10

General. Enter the same information that 

was entered on the “initial filing” of the 

following forms. Make any necessary 

changes, for example, a change of 

address.

• Form 8038, Information Return for 

Tax-Exempt Private Activity Bond 

Issues;

• Form 8038-B, Information Return for 

Build America Bonds and Recovery 

Zone Economic Development Bonds;

• Form 8038-G, Information Return for 

Tax-Exempt Governmental Bonds;

• Form 8038-GC, Information Return for 

Small Tax-Exempt Governmental 

Bond Issues, Leases, and Installment 

Sales; or

• Form 8038-TC, Information Return for 

Tax Credit Bonds and Specified Tax 

Credit Bonds.

Line 1. Enter the name of the 

governmental entity that issued the bonds, 

not the name of the entity receiving the 

benefit of the financing or the eligible 

taxpayer claiming a tax credit.

Line 4. This line is for IRS use only. Do 

not make an entry.

Lines 9 and 10. Enter the name, title, 

and telephone number of the officer or 

other employee of the issuer whom the 

IRS may call for more information. If the 

issuer wishes to designate a person other 

than an officer or other employee of the 

issuer (including a legal representative or 

paid preparer) whom the IRS may call for 

more information about this return, enter 

the name, title, and telephone number of 

such person here.

Note. By authorizing a person other than 

an authorized officer or other employee of 

the issuer to communicate with the IRS 

and whom the IRS may call for more 

information about this return, the issuer 

authorizes the IRS to communicate 

directly with the individual listed on line 9 

and consents to the disclosure of the 

issuer's return information to that 

individual, as necessary to process this 

return.

Line 11. Enter the same type of issue that 

was entered on Form 8038, 8038-B, 

8038-G, or 8038-TC. For bonds previously 

reported on Form 8038-GC, enter “small 

governmental bond.” Also enter the total 

issue price that was listed on the initial 

filing for this issue. For QZABs issued 

under section 1397E or section 54E, enter 

“qualified zone academy bond—section 

1397E” or “qualified zone academy 

bond—section 54E” and the total issue 

price.

Part II—Arbitrage Rebate and 

Yield Reduction Payments

Line 12. Enter the computation date to 

which this payment relates. The first 

rebate installment payment must be made 

for a computation date that is not later 

than 5 years after the issue date. 

Subsequent rebate installment payments 

must be made for a computation date that 

is not later than 5 years after the previous 

computation date for which an installment 

payment was made.

Line 13. Enter the amount of the rebate 

payment. A rebate installment payment 

must be in an amount that, when added to 

the future value, as of the computation 

date, of previous rebate payments made 

for the issue, equals at least 90% of the 

rebate amount as of that date. A final 

rebate payment must be paid in an 

amount that, when added to the future 

value of previous rebate payments made 

for the issue, equals 100% of the rebate 

amount as of that date.

See Regulations section 1.148-3(f).

For issues to which the 1992 

Regulations apply, see 1992 Regulations 

section 1.148-1(b)(3).

Line 14. For investments covered by the 

special yield reduction rule, rebate and 

yield reduction payments are included in 

the computation of yield for that 

investment.

See Regulations section 1.148-5(c).

Line 15. For QZABs issued under section 

1397E or section 54E, if applicable, enter 

the amount equal to 100% of the 

investment earnings in a QZAB 

defeasance escrow.

Part III—Penalty in Lieu of 

Arbitrage Rebate

Complete this section only if, on or before 

the issue date of the bonds, an election 

was made under section 148(f)(4)(C)(vii).

Line 16. Check the appropriate box for 

the number of months between the issue 

date of the bonds and the end of the 

spending period for which this Form 

8038-T is being filed. For periods greater 

than 24 months, check the box marked 

“Other” and fill in the number of months 

since the date of issue.

Note. File a separate Form 8038-T for 

each 6-month spending period.

Lines 17–19. See Penalty in Lieu of 

Arbitrage Rebate, earlier.

Part IV— Late Payments

Line 20. Under the current regulations, in 

order to qualify for a waiver of penalty, a 

failure to pay must not be due to willful 

neglect. Attach an explanation of the 

failure and the basis for concluding that 

the failure is not due to willful neglect. See 

Rev. Proc. 2005-40 for more information.

Line 21. For a failure that does not qualify 

for a waiver of penalty, the failure will be 

disregarded if the issuer pays a penalty to 

the United States. For governmental and 

qualified 501(c)(3) bonds, the penalty 

equals 50% of the rebate amount not paid 

timely plus interest on that amount. For 

other bonds, the penalty is 100% of the 

rebate amount not paid timely plus interest 

on that amount.

Note. The calculation for late interest is 

included under line 22 only, not under 

line 21.

Line 22. Compute interest at the 

underpayment rate under section 6621, 

beginning on the date the correct rebate 

amount is due and ending on the date 10 

days before it is paid.

For issues to which the 1992 

Regulations apply, see 1992 Regulations 

section 1.148-1(c)(2) for computation of 

the correction amount.

Part V—Total Payment

Line 23. Combine all payment amounts 

on lines 13, 14, 15, 17, 19, 21, and 22. 

Enclose a check or money order for the 

total amount made payable to the “United 

States Treasury.” Include the issuer's 

name, address, EIN, “Form 8038-T,” and 

the date on the check or money order.

Part VI—Miscellaneous

Line 24. Enter the amount of proceeds 

(consisting of sale, investment, and 

transferred proceeds) not allocated to 

expenditures for a governmental purpose 

of the issue.

Line 25. Enter the amount of proceeds 

used to pay principal of and call premiums 

on the bonds for which this form is being 

filed.

Line 26. Under Regulations section 

1.148-5(e)(2), qualified administrative 

costs are taken into account in 

determining payments and receipts on 

nonpurpose investments. Regulations 

section 1.148-5(e)(2)(iii) provides special 

rules for qualified administrative costs for 

guaranteed investment contracts (GICs) 

and yield restricted defeasance escrows. 

Enter the amount of any qualified 

administrative costs taken into account in 

computing the rebate amount under these 

special rules.

Line 27. Under Regulations section 

1.148-4(f)(1), fees properly allocable to 

Instructions for Form 8038-T (Rev. 10-2021) -3-
payments for a qualified guarantee for an 

issue are treated as additional interest in 

computing the yield on that issue. Enter 

the amount of such fees.

Line 28. Enter “Yes” if the issue is a 

variable rate issue. A variable rate issue is 

an issue that contains a bond that has a 

yield that is not fixed and determinable on 

the issue date.

Line 29. Enter “Yes” if the issuer entered 

into a qualified hedge. In general, 

payments made or received by an issuer 

under a qualified hedge are taken into 

account to determine the yield on the 

issue. A hedge may be entered into 

before, at the same time as, or after the 

date of issue. See Regulations section 

1.148-4(h)(1). Enter the name of the 

provider of the hedge and term of the 

hedge to the nearest tenth of a year (for 

example, 2.4 years). Attach additional 

sheets if necessary.

Line 30. Enter “Yes” if any gross 

proceeds of the issue were invested in a 

guaranteed investment contract (GIC). A 

GIC includes any nonpurpose investment 

that has specifically negotiated withdrawal 

or reinvestment provisions and a 

specifically negotiated interest rate, and 

also includes any agreement to supply 

investments on two or more dates (for 

example, a forward supply contract). See 

Regulations section 1.148-1(b). Enter the 

name of the provider of the GIC and term 

of the GIC to the nearest tenth of a year. 

Attach additional sheets if necessary.

Line 31. Enter “Yes” if any gross 

proceeds were invested beyond the 

temporary periods set forth in Regulations 

section 1.148-2(e) or 1.148-9(d).

Line 32. Indicate who prepared the 

calculations necessary for the filing of this 

form. If other than the issuer, indicate the 

name of the entity or the individual 

preparing the calculations.

Signature and Consent

An authorized representative of the issuer 

must sign and date Form 8038-T and any 

applicable certification. Also print the 

name and title of the person signing Form 

8038-T. The authorized representative of 

the issuer signing this form must have the 

authority to consent to the disclosure of 

the issuer's return information, as 

necessary to process this return, to the 

person(s) that has been designated in 

Form 8038-T.

Note. If authority is granted in Part I, lines 

9 and 10, for the IRS to communicate with 

a person other than an officer or other 

employee of the issuer, by signing this 

form, the issuer's authorized 

representative consents to the disclosure 

of the issuer's return information, as 

necessary to process this return, to such 

person.

Paid Preparer

If an authorized officer of the issuer filled in 

this return, the paid preparer's space 

should remain blank. Anyone who 

prepares the return but does not charge 

the organization should not sign the 

return. Certain others who prepare the 

return should not sign. For example, a 

regular, full-time employee of the issuer, 

such as a clerk, secretary, etc., should not 

sign.

Generally, anyone who is paid to 

prepare a return must sign it and fill in the 

other blanks in the Paid Preparer Use Only 

area of the return.

The paid preparer must:

• Sign the return in the space provided 

for the preparer's signature (a 

facsimile signature is acceptable),

• Enter the preparer information, and

• Give a copy of the return to the issuer.

Paperwork Reduction Act Notice. We 

ask for the information on this form to carry 

out the Internal Revenue laws of the 

United States. You are required to give us 

the information. We need it to ensure that 

you are complying with these laws and to 

allow us to collect the right amount of 

arbitrage rebate, yield reduction 

payments, and penalties.

You are not required to provide the 

information requested on a form that is 

subject to the Paperwork Reduction Act 

unless the form displays a valid OMB 

control number. Books or records relating 

to a form or its instructions must be 

retained as long as their contents may 

become material in the administration of 

any Internal Revenue law. Generally, tax 

returns and return information are 

confidential, as required by section 6103.

The time needed to complete and file 

this form will vary depending on individual 

circumstances. The estimated burden for 

tax-exempt organizations filing this form is 

approved under OMB control number 

1545-0047 and is included in the 

estimates shown in the instructions for 

their information return.

If you have suggestions for making this 

form simpler, we would be happy to hear 

from you. You can send us comments 

through IRS.gov/FormComments. Or you 

can write to:

Internal Revenue Service

Tax Forms and Publications

1111 Constitution Ave. NW, IR-6526

Washington, DC 20224

Do not send Form 8038-T to this address. 

Instead, see Where To File, earlier.

-4- Instructions for Form 8038-T (Rev. 10-2021)