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Nonprofits & Universities in the Crosshairs Of The IRS: A Brief History

by Justin Platt

2008 & 2009: Nonprofits Become a Target

Internal Revenue Service agents were quoted in the press saying, “If you are not reviewing executive compensation, we are.” This statement was further supported by changes in IRS Form 990 for tax-exempt organizations.  The IRS Form 990 that most tax-exempts file was dramatically revised on January 1, 2008. The IRS not only wanted to know what salaries and remuneration were paid, but also the process nonprofit organizations used to determine compensation levels.

In addition, during October of 2008, the IRS sent a 42-page questionnaire to more than 400 colleges and universities of all sizes asking about numerous financial details, including compensation, endowments, relationships to outside groups, and governance matters. The questionnaire was also extended to many public and private institutions. Throughout 2008 and 2009, the IRS started to gain perspective on the inner workings of the tax-exempt sector in order to identify organizations with unreasonable practices.

2010: The Rallying of Troops

Last year, The IRS hired 155 new employees for its Exempt Organizations office, which brought the total to 921 employees. About 100 of the new employees started working in the tax agency’s examinations office, which audits nonprofit organizations. The increased manpower raised red flags for non-profit organizations and educational institutions alike. It was a new wave of scrutiny never experienced before.

Several of the new employees are “tax law specialists” in Washington. These specialists were brought in to help guide nonprofit organizations through the process of gaining private-letter rulings that are sought after by nonprofit groups that need approval for changes to their charitable mission and/or activities. In addition, the IRS started auditing colleges and universities by focusing on compensation issues and unrelated business income taxes, which organizations pay on revenue not connected to their missions.

2011: Taking Aim

This year, the IRS has publicly stated they will place greater scrutiny on a wider range of charity activities, including compensation and loans that colleges and other nonprofit groups make to top officials. The IRS wants to be sure these groups are paying a sufficient amount of employment taxes.

Most important for these groups, the IRS says it will continue to investigate the results of the compliance questionnaire sent to 400 public and private institutions back in 2008. This questionnaire asked about unrelated business income, endowments, and executive-compensation practices. Just last year, more than 30 colleges were audited due to the results of this questionnaire. After 3 years, the IRS is starting to get a better idea of where they need to aim their efforts and what needs to take top priority.

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