College and University Audit Update

Higher Education|Not-for-Profit

By Susan Kirsch

In 2008, the Internal Revenue Service Exempt Organization Division initiated a compliance project of college and universities, one of the largest components of the tax-exempt sector. The compliance project began with a compliance questionnaire, Form 14018, that was mailed to 400 colleges and universities. The questionnaire focused on executive compensation, the investment and use of endowment funds and, perhaps of greatest interest, the reporting of unrelated business income.

Of the 400 questionnaire recipients, the Internal Revenue Service (IRS) selected between 30 and 40 schools to audit, including Central Florida, Cornell, Florida, Georgia, Harvard, Miami, North Carolina, Notre Dame, Texas and Texas A&M. It is the IRS’s intention to release a final College and University Compliance Report as soon as these audits are completed.

Appearing before the U.S. House of Representatives, Ways and Means Subcommittee on Oversight on May 16, 2012, Joanne DeStefano, Vice President for Finance and Chief Financial Officer, Cornell University, testifying on behalf of NACUBO (National Association of College and University Business Officer), addressed the IRS’s audit process. In response to a question about the time and staff resources that were directed to Cornell’s audit defense efforts, Ms. DeStefano responded that it was a three-year process involving up to 15 staff members in which “every transaction” from 2008 was examined. Cornell provided extensive materials in response to at least 50 separate information requests, including board minutes, policies regarding ethics and organization of subsidiaries, compensation data and comparability studies. DeStefano noted that the IRS should develop more reasonable and cost-effective approaches toward public and higher education audits.

On audit, one of the primary areas of focus has been unrelated business activities that have generated losses for several years and, in particular, whether historic losses are indicative of an absence of a private profit motive and, therefore, do not meet the definition of an unrelated trade or business. Organizations are advised to ensure that expense allocations to unrelated business activities are reasonable, directly related to the unrelated activity and consistently applied.

Upon issuance, the final College and University Compliance Report should provide invaluable insight to the IRS’s compliance concerns and within this sector.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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