Welcome to today’s hearing on the IRS’s final report on its Colleges and Universities Compliance Project.
Over the last two decades, tax-exempt organizations have grown increasingly complex in their organizational structures and operations. This has made it more difficult for the IRS to conduct oversight of the sector. Lending to this complexity is the prevalence of profit generating arms and investment activities within the tax-exempt organizations that may be subject to the unrelated business income tax – or UBIT.
Colleges and universities have been at the forefront of this trend toward greater complexity and the expansion of for-profit activities. These institutions have evolved to meet the changing needs of students, but have also engaged in activities that are not ordinarily associated with higher education’s tax-exempt function.
Indeed, colleges and universities are a huge part of the tax-exempt sector. They generate a disproportionate level of tax-exempt revenue and hold a disproportionate quantity of tax-exempt assets. In number, colleges and universities 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.
Given the significance of colleges and universities to the tax-exempt sector and the compliance difficulties that can be associated such a large concentration of assets and revenue, the IRS launched the Colleges and Universities Compliance Project to review compliance in this area.
The project began in 2008, with the IRS sending questionnaires to 400 randomly selected colleges and universities. The IRS then selected 34 of the 400 institutions for further examination based on questionnaire responses and Form 990 reporting, which suggested possible noncompliance. The IRS’s examinations focused on underreporting of UBIT, executive compensation, and employment taxes. The final report was issued on April 25 of this year.
The IRS found almost universal noncompliance by some of the most sophisticated organizations in the tax-exempt sector. Noncompliance included widespread calculation errors and misreporting. Ninety percent of the 34 institutions had their UBIT calculations adjusted upward for a total increase of around $90 million. The adjustments came from misreporting income from activities like facility rentals, fitness center operation, and golf courses, as well as the improper classification of loss generating activities as trade or businesses to offset for-profit income. While the UBIT rules, like many tax rules, may involve some uncertainty, these findings may suggest deeper problems with the classification of for-profit activities by colleges and universities.
Additionally, the report found that many institutions were unreasonably compensating top officials. In all, wage adjustments totaled around $36 million, with over $7 million in corresponding taxes and penalties.
Today, we will hear testimony from Lois Lerner, Director of the IRS’s Exempt Organizations Division. I look forward to hearing her views on this troubling report and look forward to taking a deeper look at the issues that have been raised. Thank you for being with us today, Ms. Lerner.