The IRS is now examining 40 colleges and universities. Approximately 400
colleges and universities received compliance questionnaires in October 2008
focusing on such issues as unrelated trade or business income, endowments, and
executive compensation issues. A comprehensive list of questions and the check
sheet can be found on the
The IRS said that the 33-page questionnaire would gather information from the
colleges and universities about how they report revenues and expenses from trade
or business activities, and how they classify these activities as either exempt
or taxable in reporting income and losses. The questionnaire also gathered
information on how these schools invest and use their endowment funds.
Significantly, at the urging of congressional leaders, information was requested
on how these institutions determine the compensation of highly paid individuals.
The two universities identified as under audit are Harvard University and
Suffolk University. While it is unknown what responses triggered these
examinations, Harvard disclosed last week in a bond offering document that it is
being audited. Harvard is selling $480 million of tax-exempt securities to pay
for an expansion of its law school and other capital projects, as well as a
refinancing of existing debt. Compensation may be at issue in Suffolk’s audit.
Its president, David Sargent, was paid $1.5 million in 2008 – the second highest
paid private university president.
The IRS has not commented on the reasons for the audits. But it previously
indicated that using comparables from third-party organizations that set their
executive salaries using the initial contract exception may result in improper
skewing of the comparables. It has also questioned the propriety of using
comparables from for profit entities. The IRS initially raised these concerns in
the context of hospitals when it released its tax-exempt hospital study in
February 2009. The IRS will also have additional information about compensation
levels and their reasonableness based upon filings on the redesigned Form 990
that includes questions related to the initial contract exception.
The selection of 40 colleges and universities identified for further
examination indicates that the IRS is serious about pursuing compliance issues
arising from the information it gathered in the compliance questionnaires. As
more information is released about additional examinations and issues, we will
keep you informed.
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