NAICU Washington Update

IRS Publishes Final College and University Audit Report, Hearing Set for May 8

May 03, 2013

After nearly five years, the Internal Revenue Service (IRS) has released its final report stemming from a questionnaire sent to more than 400 randomly-selected public and private colleges and universities in 2008. Responses to the questionnaire led the IRS to audit 34 colleges and universities. The April 25 final report found that all 34 institutions underpaid unrelated business income taxes (UBIT) by nearly $90 million, and that 20 percent of the private nonprofit colleges audited had violated IRS rules in determining reasonable compensation for campus executives.

Rep. Charles Boustany, Jr. (R-La.) announced on May 1 that the House Ways and Means Subcommittee on Oversight would hold a May 8 hearing to review the final report. Boustany, who chairs the subcommittee, said in a statement:

Given the importance of nonprofit colleges and universities, it is critical that the Subcommittee continue its review of this segment of the tax-exempt sector. The IRS’s colleges and universities compliance project suggests widespread noncompliance. The Subcommittee has an obligation to explore the root of these alarming findings on the audit of our nation’s higher education providers. This hearing is an excellent opportunity to discuss the results of the compliance project and examine areas for improvement in oversight, with an eye toward comprehensive tax reform.

The 2008 IRS questionnaires sought information on demographics, reporting unrelated business income, investments, asset management, use of endowment funds, and executive compensation. The goal was to examine potential reporting discrepancies between colleges and the IRS. The audits resulting from the questionnaire responses looked primarily at the 2008 tax returns of the colleges and universities being audited.

The report said that underreporting of UBIT resulted from 30 different types of unrelated business activities, but primarily from five areas: fitness and recreation centers, advertising, facility rentals, arenas, and golf courses.

Regarding executive compensation discrepancies, the IRS looked at compliance with Section 4958 (Intermediate Sanctions) of the Internal Revenue Code, which provides guidance for determining reasonable compensation for disqualified persons, including officers, directors, and other key employees.

IRS regulations allow organizations to obtain a “rebuttable presumption of reasonableness” by following a three-step process that includes using an independent body, providing detailed documentation of the compensation-setting process, and using appropriate salary comparisons. The audits showed that some salary comparisons were not appropriate because of problems with comparability data. These included relying on data from institutions not similarly situated and/or salary figures that were incomplete or dissimilar.

Lois Lerner, director of the Exempt Organizations Division of the IRS, said that, after disallowing certain losses, the tax liability for the schools impacted by the audit could total $60 million. Since the names of the audited colleges were not made public, only Lerner has been invited to testify at the upcoming hearing.

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