Who assesses the tax-exempt status of interest on a municipal bond?

The correct answer is Bond Counsel. Bond Counsel plays a critical role in the issuance of municipal bonds by providing legal opinions regarding the bonds. This includes determining whether the interest on the bonds is exempt from federal income tax. The opinion issued by Bond Counsel assures investors that the bonds comply with the necessary legal requirements and that the interest will be tax-exempt, which is a significant selling feature for municipal bonds.

While the IRS has regulatory authority over tax matters, including the tax-exempt status of municipal bonds, it does not perform an active assessment or pre-approval of individual bonds. Instead, the IRS might investigate or challenge the tax-exempt status after the bond has been issued, based on compliance with relevant tax laws. The underwriter and market maker do not assess tax status; their roles are more focused on the sale and trading of the bonds rather than the legal or tax implications. Therefore, Bond Counsel is specifically tasked with this assessment to ensure that the bonds meet the legal criteria for tax exemption.