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Focus on Colleges & Universities: IRS Report on Compliance Project

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The IRS recently issued an interim report on their findings from questionnaires received in late 2008 from 344 organizations. The subjects covered in the questionnaire dealt with a wide variety of topics as discussed below.
June 15, 2010

The IRS recently issued an interim report on their findings from questionnaires received in late 2008 from 344 organizations. The subjects covered in the questionnaire dealt with a wide variety of topics as discussed below.

The organizations surveyed included 177 private and 167 public colleges and universities and results were segmented based on student size:

  • Small – fewer than 5,000 students
  • Medium – 5,000 - 14,999 students
  • Large – 15,000 or more students

RubinBrown has reviewed this report and summarized key findings in five general areas:

Organizational

  • A large number of organizations reported having related entities (45% of small, 82% of medium, and 96% of large organizations) – the most common type being related tax- exempt organizations.
  • 26% of small, 34% of medium, and 45% of large organizations reported that they controlled at least 50% of one or more other entities.

Activities

  • Many organizations reported conducting a wide variety of activities that, depending on the facts and circumstances, might be exempt or taxable.
  • Generally, the percentage of colleges and universities that indicated engaging in an activity was much higher than the percentage of organizations that reported that activity on their Form 990-T.
  • Nearly half (48%) of small colleges and universities reported never filing a Form 990-T, compared with 29% for medium and 4% for large colleges and universities.
  • 30% of small, 54% of medium, and 83% of large organizations reported conducting educational programs outside of the United States.

Endowments

  • 87% of small, 97% of medium, and 100% of large organizations reported maintaining an endowment fund directly or through another entity.
  • Consistent target and actual spending rates of approximately 5% of endowment assets were reported across all size categories.

Executive Compensation

  • In most cases, the highest paid person (includes officer, director, trustee and key employee) was the chancellor/president.
  • In small and medium organizations, the highest paid employee was most often a faculty member (approximately half).
  • In the case of large organizations, the highest paid employee was most often a sports coach (43%).
  • A faculty member was the highest paid employee in 34% of large organizations.
  • More than half of the organizations in each size category reported using the rebuttable presumption procedure to establish executive compensation.
  • Comparability data was less frequently relied on to establish compensation than the other rebuttable presumption factors (approval by independent governing body and contemporaneous documentation).
  • Organizations reported that none of their six highest paid individuals were disqualified persons (persons in a position to exercise substantial influence over the affairs of the organization) immediately before entering into their compensation arrangements with the organization; thus, fixed payments fell outside of the section 4958.

Governance

  • A majority of organizations generally reported having governance policies in place in many areas, for example, written conflict of interest policies governing the ruling body and top management officials (ranging from 81% to 100%) and public availability of financial statements (ranging from 76% to 97%).

Next Steps

Currently, the IRS is conducting more than 30 examinations based on responses to the questionnaire. These examinations focus principally on executive compensation and unrelated business income issues, as well as include a review of controlled entity (IRC section 512(b)(13)) issues.

The IRS is conducting additional analysis of certain areas, particularly transactions between related organizations and with controlled entities, unrelated business activity losses and reporting, and the use of comparability data and the initial contract exception to set executive compensation.

While not directly stated in the report, colleges and universities may face more scrutiny of their compensation practices and potentially unrelated activities in future IRS exams.

Please contact RubinBrown if you would like help enhancing your policies and procedures in the above areas. We can also assist with your compliance with the IRS rules in these areas.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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