Resource Articles Back to Article List

IRS Issues Report on Colleges and Universities Compliance Project

The Internal Revenue Service (IRS) has issued the final report on its Colleges and Universities Compliance Project. The Project started in 2008 when the IRS sent out a questionnaire to 400 randomly selected tax exempt colleges and universities – public, private, small, large and medium sized institutions.

The IRS then selected 34 of these institutions, based on their responses, to examine on a more detailed level. Upon completion of the examinations, the IRS issued its final report which focuses on two main areas: underreporting of unrelated business taxable income and compensation practices of the selected organizations.

Unrelated Business Taxable Income (UBTI)

Underreporting of unrelated business taxable income (UBTI) resulted in significant increases to UBTI for the large majority of colleges and universities examined. Additionally, there were over 180 changes to the amounts of UBTI reported by colleges and universities and a disallowance of more than $170 million in losses and Net Operating Losses.

There were a number of reasons for the increases to UBTI. Some of those include claiming a loss from an activity that did not qualify, misallocating expenses to offset unrelated business income for specific activities, claiming income-producing activities as related to the organizations’ tax exempt purpose when they were not related, and miscalculating or failing to substantiate the expenses and losses on Form 990-T.

Compensation Practices

In the compensation area, per IRS requirements, organizations such as colleges and universities cannot pay more than reasonable compensation to individuals who can substantially influence the organization.

However, an organization may shift the burden of proving unreasonable compensation to the IRS by following the three steps of the rebuttable presumption process. Those steps include having someone independently review and determine the amount of compensation, relying on appropriate comparability data to determine the amount of compensation, and diligently documenting the compensation-setting process.

Due to issues with their comparability data, roughly 20% of the examined private colleges and universities who attempted to meet the rebuttable presumption standard failed to do so. Factors in their failure include using data from institutions that were not similar, lack of proper documentation of the selection criteria, and not using the same definition of compensation for all comparables.

In conclusion, as a result of the Project, the IRS will be taking a much closer look at UBTI and the compensation practices of colleges and universities and all tax exempt organizations. Higher education institutions can use the results of this survey as an educational tool to be more aware of what the IRS will be looking at in the future in regards to UBTI and the importance of using appropriate comparability data when setting compensation.

It is worthwhile to note that the IRS also examined employment tax returns and retirement plans and found reporting issues in both of these areas. If you are interested in reading the full report, please click on the following link:

Colleges and Universities Compliance Project Final Report

If you have questions or for more information, please contact Laura Ebel 989.497.5300 or Michelle DeRidder at 616.942.6440.

Note: The views expressed in this article are summarized from the IRS Exempt Organizations Colleges and Universities Compliance Report posted on the IRS website.