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 is 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 not 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.
Comments
1. avsaadasi - May 10, 2010 at 03:30 am
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2. jthelin - May 10, 2010 at 09:14 am
To add to the bill of particulars, how is it that a private corporation (e.g., a state university's athletic association) that is connected to the public institution does not have to pay rent for its numerous land occupancy facilities such as practice facilities, weight rooms, stadia, gymnasia, etc.?
3. 11134078 - May 10, 2010 at 11:56 am
What about profits from athletics? Surely these should be taxed. Operating farms teams for the NBA and the NFL is surely not related to the"core mission."
4. ellenhunt - May 10, 2010 at 12:02 pm
Oh, joy. Just what universities need right now. Audits that turn up "income" that is "unreported". That's going to help everybody get a good education. Do you think it might lower tuition costs too?
Did you know that IRS agents and departments are evaluated based on how much income they bring in fines and unpaid taxes? What is going on here is that some manager is going for a promotion by uncovering a nice juicy audit target for the IRS that is cash-flow positive. This has nothing to do with helping the country, it has nothing to do with helping education, or with helping anything, period.
For your information, universities are public service institutions, whether they are public or private, with rare exceptions. (Those exceptions are not respectable in polite company.) This means that the only thing accomplished by audits or taking money from them is harm to the country.
The proper response to this is not playing doormat, and repeating, "Mea culpa" until the IRS cleans out university bank accounts. The proper response is to do some detective work, find out just exactly WHO the IRS manager is who started this ball rolling, and go lobby on capital hill for their head on a platter.
Just because something is allowable by regulation doesn't mean it's good, right or helpful!
5. davi2665 - May 10, 2010 at 12:34 pm
Too bad that the IRS was too busy trying to invent a problem with compensation for high level executives in academia instead of trying to clean up the tax cheats in Washington D.C.- perhaps starting with the tax cheat who heads the Department of Treasury and himself oversees the IRS, and then perhaps dealing with the government officials (e.g. Barney Frank) who "forgot" to report income. But no- it is always easier to attack education.
6. greeneyeshade - May 10, 2010 at 12:37 pm
Mr./Ms. 11134078:
College athletics is one of the businesses that operates regularly at a significant loss to colleges and universities nearly everywhere. Paying taxes based on net income for athletics is a moot issue--the problem is broader than that--i.e., are the losses justifiable, or are the net losses athletics incurs detrimental to the academy?
There are many pros and cons on this issue, but based on the support for athletic programs that exists currently, one has to assume that most alumni are happy with the status quo. And purist acadamicians will continue to complain even as they demand discounts on their season's tickets.
7. sgailey54 - May 10, 2010 at 02:10 pm
The problem of higher ed salaries is dwarfed by the top salaries in corporations. I hope that IRS resources to investigate and prosecute corporations are not diverted. Institutions of higher education have enough reporting to do that diverts their own resources from the education of students. That said, non-profit institutions should be held accountable when they are top heavy with a high number of high paying employees in senior positions, which diverts money from financial aid to students. When evaluating presidents' salaries, the reference should not be necessarily be like groups. Institutions move in packs, just as corporations have done.
8. llanorealist - May 10, 2010 at 03:55 pm
Other than expecting that private university executives report their compensation in all details, what role should the IRS have in determining compensation? Why should they expect institutions to look at comparative salary studies? Their task is to tax persons and organizations and in the process expect full disclosure of taxable amounts. I am not a supporter of the "tea parties" but this surely is an example of government getting involved where government should not be.
9. squashy - May 10, 2010 at 04:53 pm
Senator Grassley and increasingly the IRS find it easier to pick low hanging fruit in the tax exempt sector of our economy simply because they can. Congress continues on both sides of the aisle to fail to look for an effective way to restore decency to top pay scales within major corporations where greed is practiced without limit. The adversde stakes for the country and our "free enterprise" system are much, much higher in the for-profit sector. Please grow up political boys and girls, acknowledge the double standard implicit here, reset your priorities, and stop being such so ridiculous in these kinds of inconsequential undertakings.
10. mbelvadi - May 12, 2010 at 06:46 am
llanorealist, non-profit status is already a government intervention, in the sense that they are "playing favorites" regarding what income-generating activity should be exempt from taxes. In exchange for accepting that favor, non-profits have to demonstrate to the IRS that they are following the rules for non-profits. It is entirely appropriate for the IRS to investigate any non-profit to make sure they aren't abusing that privilege, and that includes executive compensation. The IRS is just enforcing the laws that Congress passed about restrictions on non-profits. Any institution that doesn't like it is free to revert to for-profit status and pay taxes.
That said, I agree with those who suggested that the IRS's limited resources might serve society better if directed elsewhere.
I am constantly amazed how some conservatives pick up one tiny action by government in some sector to decry government interference in something while totally ignoring the massive bedrock of government involvement that props up that entire sector to begin with, like in intellectual property, health care, agriculture, etc. - the list is endless. And yes, higher education is a huge recipient of government funds, from federally supported loans and grants for students to the massive federally funded research grants that are critical to the financial viability of places like MIT.
11. mhick255 - May 14, 2010 at 06:25 pm
Why is the IRS interested in compensation? Because 501(c)(3) nonprofits (like most private universities) are required to justify the compensation paid to high-ranking executives. The compensation is supposed to be reasonable for the services performed, to prevent nonprofits from acting like tax-sheltered slush funds for their directors. For example, I have seen a 501(c)(3) that brought in about $700,000 in annual donations and other income, and paid out $450,000 in compensation to its executive director (and sole employee). That's an extreme example, but limits on compensation (especially for people like university presidents who have control over budgets and governance) are part of the package of receiving tax exemption.