Washington
The Internal Revenue Service has identified several potential problems with tax-code compliance in the first of two expected reports on how colleges conduct their business.
The report, which was made public on Friday, is based on a 42-page survey the agency sent in late 2008 to 400 public and private colleges of varying sizes. The survey asked the institutions to disclose details of their finances, such as whether their many business ventures were turning a profit and what kind of perks they provided their executives.
The goal of the questionnaire, IRS officials have said, is to examine potential discrepancies between colleges’ financial activities and what they report to the government.
The main concerns of this initial study are primarily on how institutions report income from the businesses they control and how they set compensation for their key employees, said Bertrand M. Harding Jr., a tax lawyer specializing in colleges and other nonprofit organizations.
The agency said it has already begun audits of more than 30 institutions based on their responses to the survey. Thirteen institutions that did not respond to the IRS questionnaire are also being examined, as well as an undisclosed number of colleges that did answer all of the questions, the agency stated. The IRS has not identified the institutions that were sent the questionnaire nor the colleges that are being audited.
Unreported Business Activities
One key issue the IRS has identified through the survey is that many public and private institutions are involved in business activities that they are not reporting as taxable income to the federal government.
For example, 45 percent of the large colleges, with more than 15,000 students, that participated in the survey reported a controlling interest in separate for-profit businesses, such as a company to develop commercial applications for research, or nonprofit organizations, such as a foundation. But among that group, only 26 percent reported receiving any income from such an entity.
“While there may be cases in which organizations had no reportable income, the difference may suggest a possible reporting inconsistency that will be reviewed further,” the report says.
The IRS is also interested in how institutions report their profits or losses on enterprises like facility rentals, bookstores, and food services. While some of those enterprises may be completely exempt from taxes-if they are related to the core mission of the college or if the activity loses money, for example-the survey found that nearly half of the small colleges responding to the survey had never filed the appropriate tax forms reporting any such activities.
Most of the institutions surveyed also are not seeking out expert advice to determine whether to report those activities, the agency found. More than 60 percent of all the colleges responding to the survey reported that they did not rely on independent accountants or the college’s general counsel on such matters.
Questions on Compensation
Another issue that has piqued the agency’s interest is how private colleges set the salaries for their top employees, such as presidents and chancellors. Private institutions can be subject to a tax penalty if they pay key employees amounts above what is comparable for similar positions at similar organizations. Forty-five percent of small colleges and 38 percent of the largest institutions in the survey reported not using the IRS’s suggested procedures for setting the compensation of their highest-paid employees.
The IRS also noted that it is concerned that too few private colleges are using an independent survey of comparable institutions to determine salaries.
The IRS will issue a final report with a more-detailed analysis of the answers to the questionnaire after it completes the current round of audits it is conducting on colleges, Lois G. Lerner, director of the IRS’s Exempt Organizations Division, said on Friday at a meeting of the Section of Taxation of the American Bar Association.
Eric Kelderman is a staff reporter at The Chronicle of Higher Education.
Comments
1. shybear309 - May 10, 2010 at 06:37 pm
It's about time these issues are being examined. Most colleges and universities "spill" more money before 10:00 any given day than it takes to operate a lot of social service organizations for a month. And when it comes to salaries, many would challenge corporations their same size--such hubris when the organizations are getting a tax break--foregone revenue--and not paying their share of taxes that support local services from which they benefit. Same goes for most hospitals.
2. dmort81071179 - May 11, 2010 at 07:09 pm
I'm not sure what colleges and universities "shybear309" is talking about. I've worked in higher ed for 3 decades and examined the affairs at many different institutions as part of accreditation work. So far I have only found hard working people with complex jobs, exacerbated by mushrooming governmental regulations, most of whch do not add any value, but simply add costs to tuition. They do this without opportunities for bonuses, profit-sharing, stock options and other forms of compensation that are available in the for-profit world. The typical higher ed institution adds huge economic benefit to a community through their payroll to employees and purchasing of goods and services from vendors, all of which generate tax revenues. My institution is building a new facility that will give the State $5 million in sales tax as a direct project cost and generate another $10 million in income tax that architects and contractors will pay on their revenues from the project, all of which is part of the project cost.
3. developmentofficer10 - May 11, 2010 at 09:33 pm
dmort81071179, the colleges and universities you have reviewed during your accrediation work sound wonderful, and the IRS will certainly not find any discrepencies between their financial activities and what they report to the government. That said; after working in higher ed for only 1/3 the time you have, I must agree with shybear309: it is about time. I know a college president who not only admitted he didn't know what a 990 was, but he was furious when he learned it disclosed the record debt he was accumulating; a president who once told his board that CPA's don't understand finance after the only CPA on the board challenged his request of the board to invest 10% of the college foundation's endowment in a risky start-up company that the president had an undisclosed ownership in (which they did, along with millions from his legislative friends, and which later went bankrupt); a president who threatened to leave if he didn't get a raise and put a few foundation board members up to giving him a $30k/year bump from the college foundation (which he kept taking for several years after the institution gave him the raise he said he was owed, without informing the foundation of this institutional raise); a president who often ignored clear conflicts of interest to further his own interests (appointing his friend as chair of the audit committee, diverting money for special marketing projects that benefited his friends children); a president that leveraged the college foundation's assets by 6 to 1 (based on loans made on knowingly over-valued in-kind donations) to launch businesses run by the college auxilliary corporation "to benefit the students;" etc., etc., etc.... The IRS is definitely on the right track - no question about it - and it is absolutely about time.
4. philfundraiser - May 12, 2010 at 07:28 pm
I work at one of the largest public universities in California and I have to tell you that the way our academic and executive leaders enrich themselves is, rather then be accountable for results, they hire someone to be accountable for those results. If a Dean is not an effective partner in development for example, they simply requisition an AVP to report to them to be accountable for that. And then the AVP hires an Assist. Dean, who hires a Senior DO, etc. etc. etc.