Compensation and Unrelated Business Income are Focus of IRS Colleges and Universities Report


Just a few weeks before many tax-exempt organizations file their annual Form 990, the IRS yesterday released its final report on the Colleges and Universities Compliance Project, which it had initiated in 2008 by sending questionnaires to 400 colleges and universities. The final report highlights two key compliance issues that emerged from 34 audits the IRS conducted as a result of its review of responses to the questionnaires: compensation and unrelated business income. In a release issued in conjunction with the report, IRS Exempt Organizations Director Lois Lerner noted that the compliance issues the IRS identified “may well be present elsewhere across the tax-exempt sector,” suggesting that the IRS may be planning particular compliance efforts with respect to compensation and unrelated business income.

Compensation -

The 34 audits focused on compliance with the “intermediate sanctions” rules that penalize the payment of excessive compensation to a tax-exempt organization’s insiders. The report indicated that most of the schools under audit attempted to comply with a safe harbor procedure contained in Treasury regulations which creates a rebuttable presumption that the organization paid reasonable compensation. However, the IRS concluded that a number of schools did not meet the precise requirements of the safe harbor procedure, generally because of problems with one aspect of the procedure: reliance upon appropriate comparability data. The report noted that typical missteps included failure to specify in the comparability data whether it included all elements of an individual’s compensation (e.g., not simply cash compensation) and reliance on comparability data from organizations that were not similarly situated (e.g., differing net assets, student numbers, or endowment size).

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