The IRS recently issued an interim report on the Colleges and Universities Compliance Project that was initiated by the Exempt Organizations (EO) function of the Tax Exempt and Government Entities (TE/GE) division. This project is a study of public and private colleges and universities that represents one of the largest segments of the tax-exempt community.
The study includes a compliance check of colleges and universities primarily focused on (1) executive compensation practices, (2) unrelated business taxable income, and (3) investment, management, and use of endowment funds. The compliance check also looks at a number of issues relating to governance in these areas.
The IRS describes a compliance check as follows:
A compliance check is a review conducted by the IRS to determine adherence to certain requirements. A compliance check also is a tool to help educate organizations about their reporting requirements and to increase voluntary compliance. A compliance check is not a review of the organization’s books and records. Organizations may refuse to participate; however, the IRS has the option of opening a formal examination whether or not the organization agrees to participate. [emphasis added] [IRS Exempt Organizations, Colleges and Universities Compliance Project Interim Report 1 (May 7, 2010)]
In October 2008, the EO sent compliance check questionnaires to 400 public and private colleges and universities that offer four-year degrees or higher. The EO received 387 responses, which included 31 from organizations that said they were not to be included in the study (e.g., they were not tax exempt or offered only a two-year degree). Note that 13 organizations did not respond and were referred to EO examination. In addition, those organizations that returned the questionnaire but did not substantially complete it or left specific questions unanswered may still be referred to EO examination.
The interim report shows data reported by 344 colleges and universities—167 public and 177 private organizations of various sizes. The EO is currently conducting examinations of a subset of the organizations that received the questionnaire.
Highlights from Preliminary Summary of Data
- Related tax-exempt organizations were the most commonly reported type of related entity for all size categories, followed by taxable corporations and trusts, disregarded entities, and partnerships.
- Only 26% of large organizations with at least one controlled entity reported receiving any income from controlled entities. Less than half of the respondents reporting income from controlled entities indicated that they had reported income from controlled entities on their Form 990-T, Exempt Organization Business Income Tax Return.
- 48% of small colleges and universities said they never filed a Form 990-T, compared with 29% of medium-size organizations and 4% of large organizations.
- The most frequently reported unrelated business income activities were facility rental and advertising.
- The percentage of colleges and universities that reported engaging in an activity was higher than the percentage that said they included that activity on their Form 990-T.
- Almost all organizations reported having an endowment fund or had another organization maintain an endowment fund on their behalf.
- The average and median target spending rates were consistent in each size category, ranging from 4.7% to 5%.
- The highest paid officer, director, trustee, or key employee (ODTKE) was the chancellor/president in the majority of cases.
- Over half the private organizations of all sizes reported using a procedure intended to satisfy the rebuttable presumption process for at least one of the six highest paid ODTKEs.
- In most cases (63% of large, 79% of medium, and 87% of small), organizations reported that none of their six highest ODTKEs was a Sec. 4958 disqualified person (i.e., in a position to exercise substantial influence over the affairs of the organization) immediately before entering into their compensation agreements.
- Most colleges and universities report making their audited financial statements available to the public (76% of small, 91% of medium, and 97% of large).
The EO has opened over 30 examinations of colleges and universities as part of this project, based on the responses to the questionnaire and information on the Form 990. The exams are focused primarily on unrelated business taxable income and executive compensation issues. The exams will also review controlled entity issues under Sec. 512(b)(13).
The IRS said it will continue to analyze the data received from the compliance check. Further work is expected to include the following:
- Analyze governance response to identify practices and policies of colleges and universities regarding potential unrelated business income implications, related organizations, and controlled entities.
- Analyze the data to determine differences reported by private and public colleges and universities.
- Test the reported data versus other sources, including outside studies and filings with the IRS (e.g., Forms 990, 990-N, 990-T, and 941).
John Miller is a faculty instructor at Metropolitan Community College in Omaha, NE. Mark VanDeveer is with Mark A. VanDeveer, PC, in Virginia Beach, VA, and is a member of the AICPA’s IRS Practice and Procedures Committee. For further information about this column, contact Mr. Miller at email@example.com.