IRS to consider expanding review of colleges, universities

by Rebecca Cress | 2/10/09 4:45am

The Internal Revenue Service may expand its review of the business practices of 400 colleges and universities, including Dartmouth, according to Peggy Riley, an IRS spokesperson. The original review began last October and consisted of a 94-question survey, which was due last Friday. Any further expansion will likely involve a second questionnaire, Riley said.

State universities and most private, nonprofit universities are exempt from paying some federal income taxes. The IRS review, called the "Compliance Project," is intended to create a profile of schools based on data about their endowment funds, business practices and other financial policies, Riley said.

"We're trying to get a better understanding of how they operate," Riley said.

Dartmouth submitted the questionnaire by the Feb. 6 deadline, according to Bob Donin, the College's general counsel. Responding to the questionnaire was voluntary, Riley said, but the IRS may conduct audits of individual schools based on the review's findings or a school's failure to respond. The number of institutions that chose to respond is not yet known, Riley said.

The questionnaire asked colleges and universities to disclose how they invest and use their endowment funds, formulate executive compensation packages, and allocate revenues and expenses between exempt and non-exempt activities, Riley said. Some schools seek to increase their endowment by investing in certain hedge funds. Institutions have to pay taxes on money invested in some of these funds, The New York Times reported on Jan. 13.

Taxable activities fall under the umbrella of "unrelated business income," or activities that generate income unrelated to the schools' "core, nonprofit activities," according to the article in The Times. Credit card agreements, advertising and facility rentals are examples of potentially taxable activities, according to a Jan. 5 article published on the law firm Venable LLP's web site.

Donin said he did not know what types of activities qualify as "core activities" or whether Dartmouth has invested in hedge funds.

Another area of inquiry, Riley said, is whether schools calculate losses on the Exempt Organization Business Income Tax Return.

The survey data resulting from this form will measure whether schools report if they have made or lost money on taxable business activities, according to the IRS.

The IRS periodically examines subdivisions of the tax-exempt sector, which principally include schools and health care organizations, Riley said. The IRS began a similar assessment of hospitals in 2006, she said.

No behavior on the part of any particular school prompted the compliance project, Riley said. The 400 colleges and universities selected by the IRS were chosen as a representative cross-section of all institutions of higher learning, Donin said.

"The College takes very seriously its responsibilities under the laws governing tax exempt organizations," Donin said.

An expansion of the current IRS review may focus on academic research, Riley said. Riley said she did not know whether an expansion in the types of questions asked would lead to an increase in the number of schools surveyed.

There is nothing unusual about the benefits Dartmouth receives from its exempt status, Donin said.

"We benefit in the same ways as other colleges, universities, nonprofit hospitals, museums and similar charitable organizations," Donin said.

Riley said the IRS expects to find that small liberal arts colleges and large research universities differ in their financial operations. Schools will be evaluated "within pools" of similar institutions, she said.

If the results of the compliance project reveal any discrepancies in the way comparable schools report their financial activities, the IRS may "publish some guidance," Riley said. The IRS hopes that it can resolve any problems through outreach and educational programs, she added.

The IRS will eventually release a comprehensive report of the questionnaire's results, although Riley said she does not yet have information on when the report will be published.

"It can take a while," she said. "It's the federal government."