October 30, 2008

C.U. One of Several Universities That Received IRS Questionnaire

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The Internal Revenue Service sent 400 colleges and universities into a quiet panic at the beginning of the month when the agency announced that selected public and private four-year colleges and universities, Cornell included, would receive a compliance questionnaire in the middle of October. The agency believes that the questionnaire will enable it to improve its understanding of the sector.
IRS Commissioner Doug Shulman explained that the questionnaires are part of an IRS effort to learn more about the spending practices of universities.
“This effort reflects our work to build a better understanding of the largest, most complex organizations in the tax-exempt sector. The information gathered will help us identify issues and areas that may need more outreach and education or further scrutiny,” he stated in a press release.
The questionnaire will gather information about how colleges and universities report revenues and expenses from their business transactions, maintain their endowment funds and determine compensation for the highest paid individuals. The questionnaire will ask universities and colleges to detail how they classify business as exempt or taxable activities and calculate income or losses on such activities.
But some remain fearful about the agency’s motives. In particular, two associations — the National Association of College and University Business Officers and the Association of Governing Boards of Universities and Colleges — plan to monitor the questionnaire closely.
They warn that the IRS will use results from the questionnaire as proof that colleges and universities should be more strictly regulated. The two associations released a joint letter to colleges and universities, urging them to be cautious when answering the questionnaire.
“We recognize the IRS questionnaire to be substantially more than a data collecting exercise by the government. This major initiative is a part of the ongoing effort to further regulate higher education institutions,” the letter stated. “And, depending on how the data are interpreted, the findings could provide a basis for ongoing review of higher education within the Congress.”
The two associations emphasized their support for the agency’s efforts towards greater transparency and accountability, but requested that colleges and universities confidentially send them a copy of the completed questionnaire in order to conduct their own independent study.
The letter stated, “AGB and NACUBO are planning to conduct an analysis of the responses submitted by colleges and universities to the IRS in order to promote clarity and understanding in the higher education community, the general public and for policymakers, regarding what these responses say about the college and university sector.”
Bertand M. Harding Jr., an attorney with a private practice in Virginia that focuses on non-profit tax law as it relates to colleges, universities and international educational organizations, believes that more could be in store for the institutions after the questionnaire is completed.
Harding stated in an email, “The IRS is pretty clear why they send out these questionnaires — to gather information on how colleges and universities are organized and operated and to identify schools for audit.”
He believes that selected colleges and universities should be especially wary because their initial responses to this questionnaire will determine whether they will be audited or not.
Yet administrators still struggle with how exactly the questionnaire should be answered and whether it can really produce accurate results.
“The very nature of the questionnaire is the flaw of interpreting how the question is asked and what is meant,” one C.U. administrator said. “You can only get so far by reading the instructions.”
The questionnaire reflects the agency’s recent focus on the not-for-profit tax-exempt sector. In late December, the IRS radically designed “IRS Form 990,” which is a report that federally tax-exempt organizations must file with the IRS each year. In addition, the IRS sent a similar questionnaire to 545 tax-exempt hospitals approximately two years ago. The IRS is still processing and analyzing the hospitals’ responses.
Although administrators confirmed that they had received the questionnaire, the University has not publicly commented on the matter.