• September 2, 2015

IRS Steps Up Scrutiny of Colleges and Other Nonprofit Groups

The Internal Revenue Service says it plans greater scrutiny of a wide range of charity activities in the next year, including compensation and loans that colleges and other nonprofit groups make to top officials and whether they paid sufficient employment taxes.

Most important for colleges, the agency said it would continue to focus on the results of a compliance questionnaire sent to 400 public and private institutions in 2008, asking about unrelated business income, endowments, and executive-compensation practices. A preliminary report on the findings of those questionnaires was released this year, and more than 30 of the colleges have been audited as a result of the agency's inquiries.

The IRS's plans follow stepped-up efforts over the past few years to oversee nonprofits. Figures released last week in a new report by the Internal Revenue Service show its audits of charities increased from 7,861 in 2008 to 10,187 in 2009, a jump of 30 percent. In 2010 the number of audits jumped 12 percent, to 11,449.

Michael Peregrine, a tax lawyer in Chicago, said nonprofits should pay close attention to the increasing number of audits, "The IRS is still fully engaged in oversight of tax-exempt organizations," he said.

That greater oversight is largely the result of an increased number of IRS employees. The report shows the IRS has added 100 employees since 2008 to the unit that handles audits of charities.

Employment Taxes

IRS officials also said their enforcement efforts had benefited from increased collaboration with the Social Security Administration and with state regulators, yielding valuable electronic data that allowed them to spot organizations that were trying to avoid paying employment taxes.

The collaboration also helped the IRS zero in on employment taxes as one of its areas of focus for next year, the agency said in a document outlining its 2011 priorities.

The IRS has been studying the employment-tax reporting practices of about 4,000 tax-exempt organizations each year since 2007, comparing information reported to the Social Security Administration against data reported on tax forms.

The agency was able to pinpoint organizations that reported paying wages to employees but didn't file a federal form to report employment taxes. Others showed compensation for officers on their informational tax forms but didn't file wage or employment tax documents for those workers.

Loans to executives, trustees, and other key employees are also drawing more scrutiny. The agency said it had studied the issue by conducting 169 audits and now will make this a regular part of its examination of charities.

Agents found loans to charity officials that were not correctly reported on the organizations' Form 990 in 91 cases; the IRS assessed more than $5-million in penalties.

The report also described IRS scrutiny of:

  • Consumer-credit counseling agencies, with which the IRS has found widespread problems in the past. The agency examined 63 of the largest credit-counseling organizations and revoked, terminated, or proposed revoking the tax-exempt status of 41 groups that the IRS said had failed to provide a charitable service.
  • Down-payment assistance groups, which offer financial and educational help to low-income homebuyers who cannot afford the initial down payment. The report says many of the groups offer the help through self-serving arrangements that disqualify them for tax-exempt status.
  • Supporting organizations, which are charities that typically collect and channel money to a specific nonprofit. The IRS says some nonprofit officials have established those organizations for their own financial benefit.

New Tax Forms

The report also contained data on filings using the redesigned Form 990. It suggested the full impact of the new form and its expanded disclosure requirements has yet to hit for many of the nation's smaller charities. That's because many charities took advantage of the three-year transitional window the IRS established, in which small organizations could file Form 990-EZ instead of Form 990. (Form 990-EZ wasn't changed when the IRS revamped Form 990 for the 2008 tax year.)

The new Form 990 requires more-detailed reporting about organizations' governance policies and executive compensation, among other things. Many groups, however, are avoiding using that form until they are required to do so.

For the 2008 tax year, for instance, organizations with gross receipts of $25,000 to $1-million and assets of less than $2.5-million could file Form 990-EZ.

That led to a big change as the number of groups that filed the regular Form 990 on paper fell 51 percent from the 2007 to the 2008 tax year. Meanwhile, the number of Form 990-EZ paper returns shot up by 80 percent.

Eric Frazier is a contributor to The Chronicle of Philanthropy. Eric Kelderman, of The Chronicle of Higher Education, contributed to this article.


1. jbarman - December 20, 2010 at 03:57 pm

I knew it! Those non-profit IHE's are up to something, and it's about time there was stricter government oversight.

I suggest that Tom Harkin create a commission to reign in these bad actors. He should formulate legislation requiring all non-profit colleges to prove that the loans they make lead to gainful employment for the recipients.

2. jbarman - December 20, 2010 at 03:58 pm

s/b "rein".

3. henr1055 - December 20, 2010 at 04:18 pm

Hay Barman they are already doing so. Executive Compensation is nothing compared to the For Profits. There is a university in my town with 2400 students one graduate program with a Pres making 2 million dollars per year. Kind of a joke really since they had a billion dollar endowment before he arrived.

By the way my non profit institution with 3800 FT students gives 100 million in financial aid, not counting gov loans and pell grants. That is 100 mil shareholders of some fly by night degree mill will never see.


4. tessareed - December 20, 2010 at 05:32 pm

I hope the IRS looks into how some public colleges classify adjunct faculty as independent contractors rather than as part time employees as a way of keeping costs down. Recently, I had to decline a job offer because the position's classification as a 1099 independent contractor is not considered eligible W2 employment for the Public Service Loan Forgiveness Program.

5. jthelin - December 20, 2010 at 05:47 pm

Let's not forgot those special corporations within and/or affiliated with universities -- e.g, university athletic associations. Salaries include $4 million for a basketball coach, $500,000 for a football coach's transition fund (he was promoted from Assistant Coach to Head Coach, from $250K to $1 million) and, of course, needs a transition fund.

One respondent invoked for profit colleges and their allegedly high salaries. Let's keep the discussion to the nonprofit tax exempt colleges, please.

6. frankmhowell - December 20, 2010 at 08:36 pm

jthelin makes a cogent point. With the South Eastern Conference (SEC) becoming the NCAA's first billion-dollar conference this past year, it begs the question of whether athletic departments and their affiliated (no matter how "technically" dissociated some may claim to be) booster organizations can continued to receive a tax-exampt status under the Federal 501(c)3 tax code. All the "goodness" that they claim to bring to participants is now a lie laid bare: witness the many who argue that college athletes should be paid for their participation since it's really a "job"!

For those of us who love collegiate sports, and I am one of those, we are also tax-payers, for the most part. These groups have an effective "set aside" tax exemption from the IRS all the while Congress debates whether the Bush-era tax cuts should be extended. It's time that all the money we spent on college sports be what it now patently is, a business. And it should be taxed!

7. ljakiel - December 21, 2010 at 10:54 am

I wish there were amateur athletic leagues in which would-be professional athletes could hone their skills.

Let the athletes who enroll in college just to try to get drafted play in an amateur league instead and be paid.

My undergraduate institution was Div III with strong men's and women's hockey programs. Most of the men only came to college after they were not drafted into the NHL out of the OHL/AHL. Seems like a better formula than the one currently operating for football and basketball.

If big-time athletics continue, I say go ahead and tax them. Maybe that will force universities to reconsider what they spend on coaching and facilities in the athletics arms race. Beer and circus, beer and circus.

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9. druce - December 30, 2010 at 10:59 am

This speaks to the fundamental question of public trust.
Did not the American people give a mandate for education by ofering a non-profit status?
Since when did it become an industry. And a profitable commodity at that for the speculative investments of endowments, student loan financing, foreign student imports and revolving door policies induced by venerated MBA programs, Law schools, and special interest contracts?
The appalling thing is, American students were fodder, and American wealth was plundered.
Schools taught students to move in conforming lockstep, including political mantras, religious do-good, union entitlement thinking and muzzled dissent - Oh, yes, easily done with punishing grades and wasted tuition money...paid from home equity loans and unemployed parents...
So, what's with education, exactly?
Is it time to rethink the paradigm? Where did it get us if it sank the ship?

10. goxewu - December 30, 2010 at 02:16 pm

It's about time! We here at Murray's Discount University's main campus (on the frontage road between the Interstate and Wal-Mart) have had G-men practicing selective enforcement since the very day of our founding last October. They've been pulling our files on MDU's exclusive Platinum Degree Leasing Program, our Christmas Eve SuperSale of Certified Previously Owned Degrees, and our proprietary ImpressYouEd technology for generating iterations of doctorate subjects by randomly combining the words "Education," "Policy," "Leadership," "Consulting," "Studies," "Services," "Administration" and "Methods."

Fortunately, the agents have gone home by the time our students arrive for MDU's midnight Rocky Horror Education Show classes in Stealth Remediation Studies. Even more fortunately, 94 percent of MDU students take their classes online via our patented LectNet streamings and PedagogyPal quizzes. This means that MDU's Lean and Mean Teaching Machine need consist of only our CEO, three administrative assistants, and one very talented IT manager. As we at MDU like to say, "With such a low overhead, everybody profits in your education."

Obviously, the IRS could better spend its resources on investigating those wiley non-profit colleges and universities than in poking around behind MDU's portable marquees.

11. gplm2000 - January 03, 2011 at 03:59 pm

The non-profit tax category should be eliminated, period. It is a niche tax favor, just like any welfare. Universities and groups like AARP are classic examples of ripping off the tax code and taxpayers. There is no justification for an exemption(s) that transfers revenue needs to the average person. If your college does not pay taxes, then the rest of us have to make up the shortfall. I wonder if non-profits would owe more taxes than the hated-rich?

12. dthornton9 - January 04, 2011 at 09:14 am

MAybe Tom Harkin should form a commission to investigate his own residency status and eligibility to actually serve as a US Senator from Iowa, instead of the Bahamas.

Please remember the money given to non-profits, 501c3's, is given by private people, of their own free will and hard earned money - which, at least until recently - they had the right to determine where it went and what they spent it on. It is not the government's business where I give my money and how they spend it. I am perfectly capable of making that determination myself. The Grennlining Organization out of California would like to change that as part of this IRS oversight. Further - I never give to the college athletic programs as I don't believe in the salaries paid, or the sex, drugs, and tattoos sported by the "student" athletes.

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