For tax-exempt bond issuers and borrowers, 2026 has brought several developments worth watching in the areas of arbitrage rebate, yield restriction, refunding transactions, and post-issuance compliance. While the fundamental requirements of Internal Revenue Code Section 148 remain unchanged, the IRS and Treasury are taking steps to clarify and update portions of the existing arbitrage regulations.
IRS Proposes 2026 Updates to the Arbitrage Regulations
One of the most important developments this year came in March 2026 when the IRS and Treasury proposed regulations addressing several aspects of the arbitrage rules under Sections 148 and 150 of the Internal Revenue Code. https://www.irs.gov/irb/2026-14_IRB
The proposed regulations would clarify or update rules concerning:
- Recovery of overpayments of arbitrage rebate and yield reduction payments;
- State and Local Government Series (SLGS) securities;
- Rebate Compliance is a Continuing Obligation;
- Transferred proceeds and refunding issues;
- The definition of a tax-exempt bond; and
- Allocations of bond proceeds to expenditures.
Of particular interest to issuers is the proposed clarification regarding overpayments of arbitrage rebate. Existing regulations generally provide a two-year period for requesting recovery of an overpayment, while Revenue Procedure 2024-37 previously extended the timing rules in certain circumstances. The proposed regulations would incorporate those revised rules directly into the regulations.
What does this mean for issuers?
Issuers should not assume that an arbitrage payment is the end of the compliance process. If an issuer later determines that an amount paid to the IRS exceeded the amount actually required, there may be an opportunity to seek recovery—provided the applicable requirements and deadlines are satisfied.
SLGS and Arbitrage: A Proposed Clarification
Another noteworthy component of the proposed regulations involves State and Local Government Series (SLGS) securities.
SLGS are commonly used by municipal issuers to invest bond proceeds while complying with federal arbitrage requirements. The proposed regulations address a situation in which Demand Deposit SLGS could be involuntarily converted into special 90-day Treasury certificates during a federal debt-limit contingency.
The IRS and Treasury determined that this situation could create uncertainty under the arbitrage rules. The proposed regulations would specifically include these special 90-day certificates within the definition of a tax-exempt bond for purposes of Section 148. Issuers may rely on this proposed provision before the final regulations become effective.
The issue is particularly relevant because interest rates remain high enough that arbitrage opportunities—and therefore arbitrage compliance—continue to warrant close attention.
Arbitrage Rebate Remains a Continuing Obligation
The IRS continues to emphasize that post-issuance compliance does not end when bonds are issued.
Under Section 148, issuers generally must monitor the investment and expenditure of bond proceeds throughout the life of the financing. When permitted higher-yield investments generate arbitrage, the issuer may be required to calculate and pay an arbitrage rebate to the United States Treasury.
The IRS continues to state that rebate computations generally must be performed at least every five years, with the applicable payment generally due 60 days after the computation date.
This makes an effective compliance calendar and monitoring process particularly important for issuers with multiple outstanding bond issues.
Post-Issuance Compliance Is Receiving Continued IRS Attention
The IRS updated its post-issuance compliance resources in 2026, continuing to emphasize the importance of identifying and correcting compliance issues on a timely basis.
The IRS specifically notes that issuers of tax-advantaged municipal debt face numerous potential tax compliance challenges and must be diligent in identifying and resolving noncompliance to preserve the preferential tax status of their bonds. IRS resources continue to address self‑correction, the Voluntary Closing Agreement Program (VCAP), examinations, and record retention.
For issuers, this reinforces an important point:
**Post-issuance compliance should be treated as an on-going process—not a once-every-five-years exercise.**
Arbitrage rebate is only one component. Issuers should also monitor the use of bond-financed property, private business use, private payments, changes to financed projects, refundings, modifications to investments, and other events that could affect the tax status of an issue.
2026 Interest Rates Continue to Make Arbitrage Monitoring Important
The interest-rate environment continues to be an important consideration for tax-exempt issuers.
The IRS reported that its individual overpayment and underpayment rate is 7% for the third quarter of 2026, and the rate will remain at 7% for the fourth quarter beginning October 1, 2026.
At the same time, the IRS continues to publish monthly Applicable Federal Rates (AFRs), which are relevant to a variety of federal tax calculations. For example, the August 2026 short-term AFR was 4.10% and the long-term AFR was 4.92% on an annual-compounding basis.
For issuers, changing market rates can affect the investment earnings generated on unspent bond proceeds and, consequently, the potential arbitrage exposure of an issue.
Don’t Overlook Transferred Proceeds and Refunding Transactions
The 2026 proposed regulations also highlight the continued importance of transferred proceeds and refunding transactions.
Refunding issues can create particularly complex arbitrage considerations because proceeds from the new issue may be allocated to investments, escrows, or other purposes associated with the refunded bonds. The proposed regulations would make changes concerning the special transition rule for transferred proceeds and the definition of a refunding issue.
Issuers undertaking a refunding should therefore make sure that the arbitrage implications of both the refunding issue and the refunded issue are evaluated as part of the transaction.
What Should Issuers Be Doing Now?
In light of these developments, 2026 is a good time for issuers to review their post-issuance compliance procedures.
Bingham recommends that issuers:
- Maintain a comprehensive inventory of outstanding bond issues and their applicable computation dates.
- Track investment earnings and expenditures for bond-related funds throughout the year.
- Monitor upcoming arbitrage rebate and yield-reduction computation dates.
- Review refundings, reallocations, and transfers of bond proceeds for potential arbitrage implications.
- Maintain adequate documentation supporting investments, expenditures, allocations, and compliance determinations.
- Review potential private business use and other post-issuance changes that could affect the tax status of an issue.
- Address identified compliance issues promptly rather than waiting until the next scheduled rebate calculation.
- Evaluate rebate calculations carefully before making payments to the IRS, including whether prior payments may have resulted in an overpayment.
Bingham has a tried-and-true formula to make arbitrage rebate easier. Issuers can also read Six Easy Tips for a Smooth Arbitrage Rebate Calculation on our website here.
Looking Ahead
The 2026 proposed arbitrage regulations are not yet final regulations, and additional changes may occur following the public comment process. Nevertheless, the proposal is a useful reminder that the IRS and Treasury continue to refine the federal arbitrage framework.
For tax-exempt issuers, the message remains straightforward: the tax compliance responsibilities associated with a bond issue continue long after the closing date.
Maintaining accurate records, monitoring investments and expenditures, tracking computation dates, and addressing potential compliance issues promptly can help issuers protect the tax‑advantaged status of their bonds and avoid unnecessary costs.
Bingham Arbitrage Rebate Services, Inc. continues to monitor developments affecting arbitrage rebate, yield restriction, and post-issuance compliance and will keep our clients informed as additional guidance becomes available.
This article is provided for informational purposes only and is not intended to constitute legal or tax advice. Issuers should consult their bond counsel or other qualified advisors regarding the specific requirements applicable to their bond issues.