Bertrand M. Harding Jr.
Bertrand M. Harding Jr. Law Offices
bharding@erols.com

Marilee J. Springer
Ice Miller LLP
marilee.springer@icemiller.com

October 2, 2008 

  IRS Issues Compliance Questionnaire To 400 Colleges And Universities 

            Yesterday, the IRS transmitted its Compliance Questionnaire for Colleges and Universities (the "Questionnaire")   to 400 colleges and universities.  As expected, the Questionnaire focuses on an institution's organizational structure, unrelated business income ("UBI"), endowment funds and executive compensation.

            The Questionnaire is extremely detailed and focuses on potential areas of abuse from the IRS' perspective.  One important development of note is that private and public colleges offering only two-year degrees are excluded from the compliance check process.  A second important point is that institutions that are members of a "university system" are instructed to confine their answers to the individual campus receiving the Questionnaire, rather than responding for the system as a whole. 

            While the Questionnaire is directed to the college or university recipient, it also requests substantial information from affiliated organizations that are related to, or controlled by, the institution.  In this regard, the institution is instructed to provide information from affiliates in the following areas: 

• Question 17:  Compensation of five highest paid employees, including any amounts received from related organizations; 
• Question 18:  Highest gross revenue generating organizations within the affiliated group (with separate reporting for disregarded entities, related tax-exempt organizations, related organizations taxable as partnerships, and related organizations taxable as corporations or trusts); 
• Part III:  All endowments held for the institution's benefit, including those held by related entities and external parties; and 
• Questions 60 and 61:  Compensation of six highest paid officers, directors, trustees and key employees, including any amounts received from related organizations.

            We recommend that institutions responding to the Questionnaire exercise caution in the following areas:  

• All information must relate to 2006, unless otherwise specified; 
• You are not obligated to compel third parties to provide information that is not in your possession or control (e.g., Question 17 regarding NCAA athletically related income); 
• Your narrative responses to some questions may significantly raise or lower your institution's risk profile for unreported UBI (e.g., Questions 21, 23, 24, 25, 27, 29 and 30);   
• Question 23 will frame whether your institution has unreported UBI, particularly debt-financed income, and highlights issues relating to whether the institution properly reported any loss deductions on its Form 990-T; 
• Question 23 also requests disclosure of facts that could negatively impact outstanding bonds (i.e., private use resulting from third party management of bond financed facilities); 
• There is a clear focus upon related party transactions and the resolution of conflicts of interest (e.g., Questions 8, 9, 35(b), 44, 45, 55, and Part IV); 
• Beware that loans disclosed in Question 62 could violate some state nonprofit statutes that prohibit loans to directors and officers; and 
• Some questions lay the groundwork for the application of the automatic excess benefit transaction penalties (e.g., Question 72 or any response that reports taxable income that was not reported on Forms W-2 or 990).

            In sum, the nature and quality of an institution's initial response to the Questionnaire will lay the groundwork for whether it is selected for an audit by the IRS.  For additional tips on assembling a team and preparing your response, see our previous article on this subject .

Bertrand M. Harding, Jr. operates his own law firm in Alexandria, VA., where he focuses in nonprofit tax law with emphasis on tax issues and problems facing colleges, universities, and international educational organizations.  A substantial component of his practice also involves representation of colleges, universities and other nonprofit organizations in controversies with the Internal Revenue Service, including in audits, in all levels of administrative appeal, and in court.  He is a frequent speaker at college and university tax conferences and is the author of The Tax Law of Colleges and Universities, published by John Wiley & Sons.    

Ice Miller is committed to practicing higher education law. More than 50 Ice Miller professionals help higher education clients accomplish their goals. We have served over 120 higher education clients throughout the United States, covering the spectrum of higher education, including state-wide higher education systems, large public research institutions, private universities and colleges, professional schools, faith based institutions, athletic conferences, industry, lobby and trade associations, support foundations, research foundations, philanthropic entities, and individual higher education leaders.