What IRS action could occur against non-compliant tax-exempt debt?

The correct answer is tax-exempt status revocation. Tax-exempt debt is specifically designed to allow municipalities to issue bonds that are not subject to federal income tax. However, this tax-exempt status comes with strict compliance requirements outlined by the IRS. If a municipality fails to adhere to these requirements, the consequences can be severe, including the potential revocation of the tax-exempt status for that debt.

When the IRS revokes tax-exempt status, this can result in the interest income from the bonds becoming taxable to the bondholders, which generally leads to higher borrowing costs for the municipality and can have negative repercussions on its ability to finance essential public projects. Compliance with IRS regulations is essential for maintaining this tax-exempt status, and any failure to comply can initiate IRS actions aimed at enforcing the tax code.

Other options such as tax exemption approval or audit clearance are not relevant as they pertain to either initial compliance processes or successful audit reviews, rather than consequences for non-compliance. Debt restructuring, while it can be a financial strategy, is not a direct IRS action resulting from non-compliance and does not address the loss of tax-exempt status. The key point is that maintaining compliance is critical for preserving the tax benefits associated with tax-exempt