The IRS recently released an interim report summarizing the data derived from compliance questionnaires sent to 400 public and private college and universities in the fall of 2008. This report contains preliminary information on the respondents’ organizational structures, demographics, exempt and unrelated business activities, endowments, executive compensation, and governance practices. While this questionnaire was only sent to colleges and universities, it serves as a compliance checklist for nearly all categories of exempt organizations.
The report focuses on the following four main topics, all of which are hot button areas of focus for the IRS:
- Unrelated Business Activities
- Endowments
- Compensation
- Governance
Unrelated Business Activities
One focus of the IRS in the questionnaire was to gather detailed information about unrelated business income activity. A large number of colleges and universities have unrelated business income activities but very few pay tax. The report confirmed this assumption as nearly all of the large colleges and universities filed the Form 990-T to report unrelated business income activities, but many did not pay any unrelated business income tax. This may be due to the aggressive allocation of indirect expenses to unrelated business activities and the use of losses of one activity against income from other activities.
In general, the report indicates that colleges and universities are engaged in multiple unrelated business activities. Facility rental was the most frequently reported activity, including use of athletic facilities, and personal property rentals. The next two highest levels of unrelated activity involved advertising and corporate sponsorships. Advertising activity examples include printed publications, Internet and television and radio broadcasting. Other frequently reported unrelated business activities included bookstores, food services, catering services, travel tours, operation of hotel, operation of conference center, operation of restaurant, operation of parking lots and the conduct of commercial research.
Endowments
Another focus of the questionnaire was to determine whether colleges and universities used their endowments for educational purposes. They have been criticized for growing endowments with no required minimum payout to serve exempt purposes as is required for private foundations.
Most of the institutions of higher education reported that they have endowment funds. Also, most of these institutions reported that another organization held or maintained endowment funds on their behalf. Nearly all colleges and universities reported having an endowment fund investment policy and they reported that they adopted and met their target spending rate. The reported target spending rates were approximately five percent. Thus, the suggestion by certain members of Congress that institutions of higher education have abused their endowment funds in this regard was not supported by the IRS’s report.
Compensation
The questionnaires also sought information about the compensation of officers, directors, trustees, key employees and other highly paid employees. Like the Form 990, the questionnaire emphasizes the importance of disclosure of all types of compensation and from all sources including related entities. The organization is asked to disclose every type of compensation paid, including bonuses, qualified and nonqualified deferred compensation and fringe benefits. The report indicated that many types of compensation were paid. Some of the most widely used included bonuses, contributions to employee benefit plans, contributions to life, disability and long-term care, personal use of organizational vehicles, value of organization provided housing and utilities and payment of health/social club dues.
Governance and Organizational Structure
The questionnaire also covers the institutions’ policies, demographics and organizational structures, as well as related organizations. As to related organizations, the highest percentage of these relationships was reported by the large colleges and universities. Related tax-exempt organizations were the most predominant but many institutions reported that they have related corporations and entities taxed as partnerships.
What you need to do:
You should review the report and questionnaire (click here). Like the Form 990, the report provides every exempt organization with a comprehensive IRS compliance checklist.
For More Information
If you have questions or would like further information, please contact:
|
