Wednesday, May 12, 2010

IRS Reports on the Nonprofit Colleges and Universities Compliance Project

The IRS recently released an interim report relating to responses to compliance questionnaires sent to 400 public and private colleges and universities. Colleges and universities make up one of the largest nonprofit segments in terms of revenue and assets.

After combing though the report, I noted several items of particular interest:

  1. Endowment funds. The target spending rate for endowment funds in the study range from 4.7% to 5.0%. Charles Grassley, (R-IA) has pushed hard for a minimum 5% endowment spending rate. There are some that might suggest the 5% goal effectively becomes a ceiling on the endowment spending rate.

  2. Highest paid employees. In the case of large organizations, the highest paid employee was often a sports coach—(43% of organizations).

  3. Use of the rebuttal presumption: More than half of the organizations in each size category reported using a rebuttal presumption process to establish key compensation. On all size levels, the use of comparability data to establish compensation was present less frequently that the other rebuttal presumption factors (adequate documentation and approval by an independent governing body). One would have expected the percentage of organizations using the rebuttal presumption to be much higher.

  4. Conflict of interest policies. While 80% of organizations in each size category are reporting having conflict of interest policies covering members of the ruling body and top management officials, it is surprising that this percentage is not 100%.

  5. Unrelated business income. One key issue the IRS has identified through the survey is that many public and private institutions are involved in business activities that they are not reporting as taxable income to the federal government.

    Most of the institutions surveyed also are not seeking out expert advice to determine whether to report those activities, the agency found. More of the institutions surveyed also are not seeking out expert advice to determine whether to report those activities, the agency found. More than 60% of all the colleges responding to the survey reported that they did not rely on independent accountants or the college’s general counsel on such matters.

  6. Disclosure of financial statements. Only 76% of small colleges and universities reported making their audited financial statements available to the public while 91% of medium-sized organizations and nearly 97% of large colleges and universities reported doing so. ECFA members are required to make their financial statements public. It is surprising that 100% of the organizations studied are not committed to this important step of transparency.

  7. Compensation policy. Only 34% of the smaller organizations had a formal written compensation policy and even the large organizations only averaged 63% with a formal written compensation policy. These numbers are surprisingly low.

The IRS said it has already begun audits of more than 30 institutions based on their responses to the survey. Thirteen institutions that did not respond to the IRS questionnaire are also being examined, as well as an undisclosed number of colleges that did answer all of the questions, the agency stated. The IRS has not identified the institutions that were sent the questionnaire nor the colleges that are getting audited.

It will be interesting to see if this compliance project becomes a model for questionnaires and compliance in other niches in the nonprofit arena.