As part of its efforts to better police nonprofit organizations, the Internal Revenue Service will ask some 400 colleges across the country to disclose intimate financial details of their operations.
The federal tax agency announced on Wednesday that it had completed a 42-page questionnaire, including nine pages of instructions, for the first phase of its “Colleges and Universities Compliance Project.”
The questionnaire requires the colleges to report a wide variety of financial data, including what they spend on perks like housekeeping services for executives, and their income and losses on business activities, such as catering services and travel tours.
The colleges involved in the project include a sample of small, midsized, and large institutions, both public and private. They will be receiving the questionnaires in the next few days.
“I’m not looking forward to it,” said Michael O’Neill, manager of payroll and tax services for the University of California system. Although most institutions collect some of the information that the IRS is seeking, many different and unrelated departments will have to coordinate their efforts to assemble the data, he said.
The questionnaire is meant to take an in-depth look at potential discrepancies between the way institutions operate and how they report their activities to the IRS.
While the IRS will not publicly report the data from individual institutions, the information could trigger audits and even penalties for the colleges, as well as more-minor actions alerting the institutions to their errors. As it has done with other compliance questionnaires, the IRS plans to report on its collective findings.
In recent years, the IRS has taken several similar actions to make sure that tax-exempt organizations are following the rules.
At the same time, U.S. Sen. Charles E. Grassley, Republican of Iowa, has used his position as the top Republican on the Senate Finance Committee to question the role and practices of nonprofit organizations.
Last month, Senator Grassley held a roundtable discussion on college costs, and he has suggested that Congress consider requiring universities to spend a minimum amount of their endowments each year, as private foundations are required to do.
“Transparency brings accountability,” Senator Grassley said in a news statement on Wednesday. “As tuition increases go through the roof and families are struggling, colleges need to show they’re going the extra mile to control costs and provide financial support to students.”
Business Income and Executive Pay
This college survey is more detailed than a May 2006 questionnaire the agency sent to nonprofit hospitals and focuses heavily on the outside businesses that colleges operate or work in partnership with, said Ronald J. Schultz, a senior adviser at the IRS.
Colleges’ business activities could include such things as running a hotel or a commercial research venture with a for-profit company. Although the colleges are tax-exempt, some of their business activities, like selling recreation-center memberships to local residents, are taxable, unless the business loses money.
In fact, nearly half of the colleges’ unrelated businesses operations earn zero profit or take a loss, said Mr. Schultz, and the IRS wants to find out why so many of those endeavors are losing money every year. (Read The Chronicle’s special report on charities and the unrelated business income tax.)
Another major part of the IRS questionnaire asks about how colleges compensate their six highest-paid executives. The form requires the institutions to disclose if they pay for health-club or social-club dues, private use of an institution’s aircraft or boat, personal travel for family members, or loans, among other things.
“There’s a lot of ‘gotcha’ questions,” said Sean P. Scally, university counsel and tax lawyer for Vanderbilt University. If an institution lists a form of compensation that it hadn’t previously disclosed, it could face more scrutiny: “You’re playing audit roulette,” he said.
Mr. Schultz said the agency focused on executive compensation because of the high percentage of reporting errors it found in that area when the IRS surveyed other nonprofit entities about their compensation practices.
The other sections of the questionnaire probe how colleges invest and spend their endowment funds and compensate their five highest-paid employees, other than executives, which could include athletics coaches or researchers.