Friday, May 3, 2013
Late last month, the Service issued its Final Report of the Colleges and Universities Compliance Project. The report is based on "the responses to Questionnaires the IRS sent to a sample of 400 colleges and universities and on the results of examinations of 34 colleges and universities. Among the highlights:
- Increases to unrelated business taxable income for 90% of colleges and universities examined totaling about $90 million;
- Over 180 changes to the amounts of UBTI reported by colleges and universities on Form 990-T; and
- Disallowance of more than $170 million in losses and NOL's (i.e., losses reported in one year that are used to offset profits in other years) which could amount to more than $60 million in assessed taxes.
The IRS also determined that nearly 40% of colleges and universities examined had misclassified certain activities as exempt or otherwise not reportable on Form 990-T. Fewer than 20 percent of these activities generated a loss. The examinations resulted in the reclassficiation of nearly $4 million in income as unrelated, subjecting those activities to tax.
Finally, the report notes that about 20% of private colleges and universities implemented procedures that would qualify them for the rebuttable presumption against engaging in an excess benefit transaction with respect to IRS 4958 (Intermediate Sanctions). Those institutions not qualifying for the rebuttable presumption had the following problems:
- Comparability data from institutions that were not similarly situated to the school relying on the data, based on at least one of the following factors: location, endowment size, revenues, total net assets, number of students, and selectivity;
- Compensation studies that neither documented the selection criteria for the schools included nor explained why those schools were deemed comparable to the school relying on the study.
- Compensation surveys that did not specify whether amounts reported included only salary or included total other types of compensation, as required by section 4958.
The Executive Summary suggests that the IRS will focus on UBTI issues more closely, as those issues relate to Colleges and Universities:
The examinations of college and universities identified some significant issues with respect to both UBI and compensation that may well be present elsewhere across the tax-exempt sector. As a result, the IRS plans to look at UBI reporting more broadly, especially at recurring losses and the allocation of expenses, and to ensure, through education and examinations, that tax-exempt organizations are aware of the importance of using appropriate comparability data when setting compensation.