Nonprofit College and University Study Results in IRS Audits
Preliminary findings from the long-awaited
IRS Exempt Organizations Colleges and Universities Compliance Project show that many survey respondents didn’t report all of the activities with potential unrelated business income implications on their tax returns.
The IRS opened examinations of more than 30 higher education institutions based on the Form 990, Return of Organization Exempt From Income Tax, and data gathered in the questionnaire, which was distributed to approximately 400 public and private colleges and universities in 2008.
“Determining whether business activities are related or unrelated to an organization’s exempt purpose is sophisticated, and noncompliance can result in fines, sanctions, and the loss of the tax-exempt status,” explains Karen Gries, tax principal with LarsonAllen.
She believes all higher education leaders should familiarize themselves with the interim report to compare their institutional practices to the risk areas summarized in the study:
- Unrelated business income
- Executive compensation
- Controlled entity issues
The IRS will also review governance procedures, now addressed in the Form 990, according to Gries.
Tax compliance project summary
The interim report was published in May 2010, and gives insight into the financial affairs of some of the largest organizations in the tax-exempt sector. A random sampling of small, mid-sized, and large nonprofit schools were surveyed on organizational structures, demographics, exempt and unrelated business activities, endowments, executive compensation, and governance.
Unrelated business income
A significant portion of the 33-page questionnaire centered around the income treatment of business activities. Forty-seven different types of taxable and non-taxable activities were scrutinized. Below are the most common activities, which may be classified as unrelated business income and subject to tax:
- Advertising and corporate sponsorships were most often included in printed materials and publications; however, Internet, facilities, and broadcasting were a standard medium for the activities.
- More than 50 percent of the respondents reported renting facilities, but the activities conducted by the organizations also included personal property, telecommunications, and other rentals.
- Internet and catalog sales, travel tours, affinity cards, mailing list rentals, logo usage, research, hotel, restaurant, and conference center operation, and other activities were also reported.
Although, the study indicates possible unrelated business income, a large percentage of the respondents said they did not file a Form 990-T, Exempt Organization Business Income Tax Return. Generally, the large colleges and universities reported the highest percentage of activities on the Form 990-T, while small colleges and universities had a lower percentage.
|
Small
|
Medium
|
Large
|
Organizations That Never Filed a 990-T
|
48%
|
29%
|
4%
|
Source: IRS Exempt Organizations Colleges and Universities Compliance Project, page 27.
When it comes to engaging advisors, the study says, “More than 60 percent of the colleges and universities in each size category reported they did not rely on outside advice on unrelated business income issues, such as determining whether business activities were related or unrelated to the organization’s exempt purpose, the allocation of expenses between related and unrelated business activities, and inter-company pricing between the organization and related entities.”
Compensation
The questionnaire also obtained compensation and benefits details for certain highly paid individuals, officers, directors, trustees, and key employees. In addition, respondents were asked to identify the practices used to establish reasonable compensation levels within their organizations.
How we can help
We help clients protect their tax status by analyzing unrelated business income, expense allocations, and executive-level compensation. Learn about LarsonAllen’s unrelated business income tax (UBIT) analyzer.
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Karen Gries, Tax Principal
kgries@larsonallen.com or 612-376-4716
View our tax and nonprofit and government principals.