OUR THOUGHTS ON:

IRS Releases Final Report in Connection with Colleges and Universities Compliance Project

Higher Education|Not-for-Profit|Tax

By Tod Wilson

The Internal Revenue Service (IRS) recently released its final report in connection with its Colleges and Universities Compliance Project. The initiative began in 2008 with compliance questionnaires sent to more than 400 randomly selected educational institutions. The IRS selected 34 schools for audit based on questionnaire responses and Form 990 disclosures.

The report's findings included commentary on executive compensation, endowments, employment tax issues and unrelated business income (UBI). Not surprisingly, a good deal of the report was devoted to the underreporting of UBI, which amounted to proposed adjustments of approximately $90 million in additional taxable income.

Chief sources of UBI for colleges and universities include income from advertising, facility rentals, food service, golf courses, arenas, hotels, parking lots, fitness centers and bookstores.
The IRS cited the following as reasons why the unrelated income was underreported:

  • Business activities were misclassified as exempt from tax;
  • Incorrect methodology for allocating expenses;
  • Losses not connected to the unrelated activity were used to offset taxable income; and
  • Net operating losses were not calculated correctly and were not substantiated.

In addition to the $90 million in current taxable income, the disallowance of more than $170 million in losses and net operating losses could result in more than $60 million in assessed taxes.

The IRS is careful in its report to emphasize that the institutions examined were not randomly selected, and therefore, its findings are not necessarily representative of the entire college and university community. However, the report is a helpful reference for anyone in the industry, particularly those organizations that have historically sustained operating losses in connection with unrelated business activities.

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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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