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The Internal Revenue Service plans to survey hundreds of colleges and universities in 2008 to better understand how they invest and use their endowments, set executive compensation, and calculate their unrelated business income. The information gained from the survey is designed to give the government a clearer sense of whether postsecondary institutions are engaging broadly in practices that, as they have come to light anecdotally, have raised the hackles of some lawmakers and others.
The plan was described in a new annual report that summarizes the recent accomplishments and future goals of the IRS's Exempt Organizations division, and officials of the agency discussed it on the same day that they made public the final version of Form 990, the main informational tax return that colleges and other nonprofit groups must file each year (more on that later).
As part of the IRS's "research and compliance initiative" for colleges and universities, the agency will "gather information from a stratified sampling of colleges and universities," which, it notes, "make up one of the largest segments" of the nonprofit world. The IRS conducted a similar review of hospitals last year, and released a report on its findings this summer.
The IRS said its review of colleges -- which higher education officials said they had been told would involve in the neighborhood of 500 institutions -- would focus on how colleges:
- Report income and expenses on Form 990.
- Calculate and report losses on Form 990-T.
- Allocate income and expenses in calculating their unrelated business taxable income.
- Invest and use their endowments.
- Determine executive compensation.
Several of those issues have been raised by members of Congress or have surfaced in controversies that have engulfed individual colleges -- or both.
Scandals involving the compensation paid to American University's former president, as well as similar questions about the practices at the American Red Cross, for instance, prompted Sen. Charles Grassley (R-Iowa) and the Senate Finance Committee to examine how governing boards set the pay of presidents, and explore nonprofit trustee oversight generally. A former member of Congress, the now-retired Rep. Bill Thomas of California, last year questioned whether colleges with big-time sports programs should pay tax on the revenues from those programs.
And senators and presidential candidates alike have raised the prospect of requiring colleges to pay out a minimum proportion of their endowments each year, fed by the assumption that there are scores of wealthy institutions hoarding cash when they could be spending it to make higher education more affordable for more students.
Lois G. Lerner, director of exempt organizations at the IRS, said in an interview Thursday that agency officials had decided to take a closer look at colleges because "we haven't looked at them for a long time," and in "recognition of the noise that's out there -- enough noise that we need to look better at what's really happening."
Lerner said that by collecting up to date and detailed information from a wide range of colleges and universities, the IRS would be in a much better position to decide whether and where problems existed and how best to allocate the agency's resources to deal with them. The information the agency develops may lead to new guidance about some things, more audits, or even proposed legislation -- but it will be based on data, rather than anecdote, she said.
Matthew W. Hamill, senior vice president for advocacy and issue analysis at the National Association of College and University Business Officers, described the IRS initiative as "informational" rather than necessarily punitive -- designed to "learn more about the scope and diversity of practices, so they can target their attention in an informed way, where they believe there might be problems. That's their job."
He credited the agency with getting advice from his group and other tax experts in higher education since last summer about how to frame the questionnaire that will be sent to college officials, so that the information the agency gets back is useful. "They want to push the right piece out to get the best information back," Hamill said. He added that while college officials would not be legally bound to respond to the IRS survey, he thought the vast majority of them would.
Bertrand W. Harding, a lawyer who advises colleges on tax issues and author of The Tax Law of Colleges and Universities (Jossey-Bass), said he viewed the agency's decision to delve more deeply into higher education a recognition that "they probably don't really know very much about what's going on, and want to take action based on real live information rather than the anecdotal tales they're hearing."
At the same time, Harding said, "they must have fairly deep-seated intuition or guess that there may be some bad stuff going on. Otherwise, why go through the trouble if you don't think there's something at the end of the rainbow."
Harding noted, though, that the agency's review of hospitals "didn't find much" in the way of wrongdoing, and said he suspected "they'll find the same thing" in higher education. I don't think there are a bunch of [American University's] out there."
The IRS survey planned for next year isn't the only way in which colleges and universities will soon have to make more information available to the federal agency -- and the public. On Thursday, the revenue service unveiled the final version of its revamped Form 990, the informational tax form that tax-exempt entities must file annually. The redesign and new reporting requirements for the form in many ways pose much bigger changes for small charities that haven't had to file the form in the past than it does for colleges, most of which have gotten used to the scrutiny that the information on the form invites, most notably in listing the pay of their top officials.
But the changes will nonetheless require significantly more reporting than has been true in the past, and college groups raised a series of objections about a draft of the form that was released in June, focused mainly on the increased administrative burden and the risk that it would require institutions to report proprietary information.
IRS officials said they had tried to respond to those and other concerns (raised in 3,000 pages of comments) in releasing the final version of the form, which institutions will begin filing in 2009 for the 2008 tax year, and the agency did ease some of the demands that it had considered imposing in the June draft.
But compared to the current form, the new form requires nonprofit groups to report significantly more data about their financial operations and endowments, as well as information about how they are governed, tax-exempt bonds they have issued, and compensation top officials have received from related nonprofit organizations.
The new form drew praise from Grassley. "I’m glad the IRS is seeking more reporting about endowments, including university endowments. Universities are tax-exempt, and the size of their tax-free endowments should be public," he said in a prepared statement. "That’s of interest to the public as tuition costs go through the roof."
