For the past few years, the IRS has been researching how some of the largest and most complex organizations in the nonprofit sector comply with reporting regulations. First up were hospitals (see the 2009 study on tax-exempt hospitals and their community benefit and executive compensation) and now a report on colleges and universities.
The interim report on the Colleges and Universities Compliance Project, released on May 7, 2010, is based on 344 survey responses from a sample of 400 public and private colleges and universities offering four-year degrees or higher. The 177 private and 167 public respondents were divided into three size categories: small (fewer than 5,000 students), medium (5,000 to 14,999 students), and large (15,000 and more students).
Not surprisingly, most of the small colleges and universities were private institutions, and most of the large colleges and universities were public. This interim report provides some insight on the issues of IRS focus and concern for nonprofits of all kinds.
Initial Findings on Hot-Button Issues
Filing of Form 990-T
- Nonprofits must pay tax on income from activities that are not substantially related to furthering their exempt purpose, called unrelated business income and reported on Form 990-T.
- Advertising, corporate sponsorship, and facility rental income were most often reported on the survey, but a much lower proportion reported these activities and the income from them on Form 990-T.
- There will be further study on this discrepancy in the final report.
- Almost all respondents had endowment funds, most with external fund managers, typically paid a fee based on assets.
- Most reported spending rates of about 5 percent annually of the endowment total.
- Investment guidance from outside consultants was most often approved by investment committees.
- Endowment assets were most often invested in U.S. fixed-income and U.S. equity investments.
- The highest-paid person in the officer, director, trustee, or key employee category (known as ODTKE to 990 devotees) was most often the position of chancellor/ president, with an average salary of $428,000 for the large universities and $202,000 for the small ones.
- Higher-paid staff not included in the ODTKE group were most often faculty members in small colleges and universities, and typically a sports coach at the larger schools.
- Over half of these filers tried to establish a "rebuttable presumption" when setting compensation—that is, they used a procedure that included collecting appropriate comparable data, contemporaneous documentation, and approval by an independent governing body (this process puts of the burden of proof on the IRS to show that compensation is excessive). The comparability data most often used were published compensation surveys for similar institutions.
Next Steps for the IRS
Nonresponders and Problem Responses
- The 13 colleges and universities that received a questionnaire and did not respond are now in the midst of full IRS examinations.
- Based on their survey responses, 30 more colleges and universities are facing full IRS examinations, focusing primarily on unrelated business taxable income and executive compensation issues (including the use of the rebuttable presumption procedure, the initial contract exception, and the appropriateness of comparability data used).
The Final Report
- The data will be weighted in a final report so that findings can be applied to the whole sector and also evaluate if there are differences between public and private colleges and universities.
- Data will be tested against other data sources (other IRS filings, other studies) and information provided in narrative form will be analyzed.
What the Report Means for Other Nonprofits
The IRS is continuing to investigate and identify possible problem areas of nonprofit reporting that include (1) use of controlled entities and related organizations; (2) whether income from various activities is being properly reported on the 990-T; (3) how comparable data is used to set executive compensation; and (4) the use—or misuse—of the rebuttable presumption procedure. Be sure that your Form 990 addresses these areas carefully and accurately—the IRS will be reviewing your filing.
And if the IRS does send you a questionnaire, do fill it out—a full examination of your Form 990 is guaranteed if you ignore it!
Linda M. Lampkin, ERI Economic Research Institute
© 2010, ERI Economic Research Institute
Linda M. Lampkin is research director of ERI Economic Research Institute (www.erieri.com), a company that provides Form 990 compensation data for use by nonprofits, and former director of the National Center for Charitable Statistics at the Urban Institute. She can be reached at email@example.com or (877) 799-3428.