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A new IRS report sheds light on issues with two areas of college and university tax compliance — unrelated business income and executive compensation.

IRS Report Reveals Tax Compliance Issues in Higher Education

  • 4/26/2013

Just-Released IRS Report Reveals Tax Compliance Issues in Higher Education

A much-anticipated report on tax law compliance of colleges and universities was issued April 25 by the IRS. The report, based on a 2008 questionnaire and recent IRS examinations of colleges and universities, sheds light on two major areas of tax compliance — unrelated business income (UBI) and executive compensation — and could signal heightened scrutiny of the activities and finances of higher education organizations nationwide.

Speaking at a conference hosted by Georgetown University, Lois Lerner, director of the IRS Exempt Organizations Division, said that examinations of 34 colleges and universities revealed more than $90 million of underreported UBI.

Lerner said the IRS uncovered UBI issues in a number of areas, including:

  • Organizations claiming losses for activities that never generated income or had continuing losses
  • Expenses that did not have primary and proximate relationship to the activity
  • Unrelated activities inappropriately classified as related activities
  • Erroneously calculated net operating losses

In the area of executive compensation, Lerner reported that while the examined colleges and universities tried to follow rebuttable presumption rules, they frequently fell short when it came to having appropriate comparability data, even when the organization used an independent compensation consultant.

“The findings of this report are revealing to exempt higher education organizations across the country,” says Bill LeClaire, the head of CliftonLarsonAllen’s higher education practice. “It is cause for finance officers and administrators to re-examine past practices in light of the attention being focused in these areas.”

The report states that, since colleges and universities were not randomly selected for examination, no assumptions should be drawn about the UBI and compensation practices of other colleges and universities based on the examination results.

The origins of the report date back five years, when the IRS sent compliance questionnaires to 400 colleges and universities, probing into areas such as UBI, compensation, and governance. Approximately 98 percent of those surveyed responded, giving the IRS a wealth of knowledge about the tax compliance status of the college and university subsector. The IRS’s subsequent review of these responses lead to the examinations of 34 colleges and universities. The final report draws data from those examinations.

How we can help

More than 50 years of service in higher education gives CliftonLarsonAllen’s CPAs and consultants unique insights into the challenges facing today’s educational institutions. Our professionals can assist colleges and universities in examining past tax strategies and practices to help them comply with applicable tax laws.

Bill LeClaire, Higher Education Partner, 320-203-5521