Ways and Means Committee Holds Hearing on Higher Ed Tax Compliance

On May 8, the House Ways and Means Subcommittee on Oversight heard testimony from the IRS’s Director of the Exempt Organizations Division, Lois Lerner, regarding the agency’s recently released Final Report on the College and University Compliance Program (CUCP). What follows is a brief overview of the hearing.

In his opening statement to the hearing, Representative Charles Boustany (R-LA), the subcommittee chairman, indicated that the colleges and universities have been at the forefront of a trend of exempt organizations growing more and more complex in their organizational structure and operations. According to Boustany, higher educational institutions also generate a disproportionate level of tax-exempt revenue and hold a disproportionate amount of assets, since they “represent just 0.5 percent of the tax-exempt sector, but generate more than 11 percent of the revenue of charitable organizations, nearly $160 billion in annual revenue. And they hold over $150 billion in assets, which is more than 21 percent of the entire charitable sector’s assets.”

As the hearing continued, the issue of unrelated business income (UBI) took center stage. A number of the Congressional representatives suggested they could not believe that noncompliance with tax laws—a key finding in the IRS report—could be so widespread and wondered aloud whether legislation was needed to address the problem. They also questioned whether similar noncompliance was pervasive throughout the broader exempt organization community.

In response to those concerns, Ms. Lerner, the IRS director, said the IRS would need to look at a broader segment of the sector before making suggestions for legislative changes. She added that the IRS is currently examining other organizations that reported substantial gross UBI for three consecutive tax years but reported no income tax due, in order to determine the scope of the problem.

On the role of auditors, one member of Congress asked whether a college or university’s auditors typically certify the accuracy of the tax return. Lerner indicated that auditors become involved with the accuracy of the return when they had been engaged to be the tax preparers.

The CUCP report’s findings on executive compensation—which were unveiled just a few weeks before the Chronicle of Higher Education released its own, widely reported executive compensation study—were another point of contention during the hearing. Several subcommittee members expressed concern at the high salaries reported, particularly as schools continue to raise tuition.

As the IRS reported, average compensation for the highest-paid officials including the following:
Top management official $623,267
Investment Managers $894,214
Sports Coaches $884,746
Heads of departments $753,738
Faculty $753,738

An editorial aside: As part of most organizations’ audits, there must be verification that there are no material uncertain income tax positions.  Exemption itself is a tax position as is unrelated business income tax.  This accounting requirement, ASC 740-10, previously known as FIN 48, requires an organization to look at all tax positions to see whether it is more likely than not that they would prevail upon audit and assumes that tax authorities are examining the organization and all the facts are known.  One wonders whether the universities in question had done adequate inventorying and documentation of their tax positions.  Documentation and analysis are always important when it comes to taxes.  Organizations that think they are at risk should consider having a UBIT study, compensation analysis or even a mock IRS audit done.