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Welcome to this inaugural
article in an electronic series devoted to the
tax issues uniquely impacting colleges and
universities. The Law Offices of Bertrand
M. Harding, Jr., together with Ice Miller LLP,
are pleased to launch this series as a platform
to share news, articles and issues with the
higher education community.
Our first article will
focus on the impending IRS compliance check of
colleges and universities.
IRS FY 2008 EO
Implementing Guidelines
As the IRS
hinted in previous years, it intends to commence
a research/compliance initiative this year
directed toward colleges and universities.
Specifically, the IRS intends to analyze how
colleges and universities: (a) report income and
expenses on Form 990; (b) calculate and report
losses on Form 990-T; (c) allocate income and
expenses in calculating their unrelated business
taxable income; (d) invest and use their
endowments; and (e) determine executive
compensation.
The IRS intends
to use the same compliance check format that it
utilized in the last several years in regards to
executive compensation and hospitals. In
the hospital context, the IRS transmitted
approximately 544 questionnaires, and 487
hospitals responded (taxable and governmental
hospitals were released from the process).
The questionnaire was 9 pages long and included
81 detailed questions. The IRS required
responses in 4 weeks and then granted one,
uniform 3-week extension to all
participants. The inquiries did not
correspond either to Form 990 data or, in many
cases, industry standard financial or accounting
terms. Therefore, the participants were
required to gather, analyze and report volumes
of unique data under very strict time
deadlines.
Two patterns
emerged in both the executive compensation and
hospital compliance checks. First, many
organizations identified areas of noncompliance
when preparing their responses and were required
to carefully self-report these issues in the
context of the compliance check. Second,
and not surprisingly, the IRS used the responses
to assess risk and identify organizations that
warranted more specific follow-up, including the
use of issue specific and full audits.
Therefore, the lesson to be learned by the
higher education community from the hospital
experience is that the nature and quality of an
institution's initial response to the compliance
check will determine whether it is selected for
additional scrutiny by the IRS.
From these prior
compliance checks, we have accumulated
experience that will aid colleges and
universities that are selected for the pending
compliance check. In particular,
institutions and the industry can proactively
prepare as follows:
- Assemble a team
now that will be responsible for gathering the
necessary data and preparing the written
response. This will be particularly
important given the tight deadlines that will
likely be imposed on the response.
Participants should include tax, accounting,
audit, and legal representation. In
addition, based upon the final content of the
compliance check, if affiliated entities are
included, the team should include a designated
representative from each affiliate.
- If your
institution is selected to participate in the
compliance check, carefully consider the
following:
- Are affiliates
expressly included in the request for
information? If not, avoid reporting their
data or activities;
- Avoid the
natural inclination to respond "yes" or "no" if
a detailed narrative would more accurately
describe and qualify your particular
facts. Tell your institution's story in
your words;
- Pay careful
attention to the nature of the inquiry and the
desired data. The inquiry may not
correspond to typical tax or accounting
terms. For example, in the executive
compensation arena, the desired characterization
of fringe benefits may not correspond to either
W-2 compensation or Form 990
disclosures;
- Proactively
share positive practices, policies and
procedures that demonstrate an institutional
commitment to compliance;
- Be aware of the
past compliance checks and the IRS' position in
regard to them. For example, the IRS
learned a great deal from the executive
compensation check and intends to translate that
experience in a series of questions on the
college and university questionnaire;
and
- Participate in
industry forums throughout the response period
to ensure your institution is aware of how peer
institutions are interpreting and responding to
the compliance check (see next
point).
- Finally, in the
hospital context, industry groups quickly
organized and facilitated teleconferences with
IRS officials to discuss common questions and
trends that were emerging as participants
prepared their responses. For example,
this process identified populations that were
not intended for response (taxable and
governmental hospitals) and removed them from
the process. This approach is strongly
recommended for the college and university
community as well.
We hope that
this platform is useful to you, and we encourage
you to share your topics and questions for
future publication. Email us your
views.
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 assist 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.
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This publication is intended for general
information purposes only and does not and is
not intended to constitute legal advice.
The reader must consult with legal counsel to
determine how laws or decisions discussed herein
apply to the reader's specific
circumstances. | | |
