Regulatory Focus On Colleges And Universities Is Increasing

In the last two weeks, both the IRS and Congressional officials announced major milestones in the increasing regulatory focus on colleges and universities. First, the IRS emphasized misreported taxable income and employee compensation in its Final Report from the IRS Colleges and Universities Compliance Project, released on April 25, 2013 (the "Final Report").

Chairman Charles W. Boustany, Jr. (the "Chairman"), of the Subcommittee on Oversight of the Committee on Ways and Means (the "Subcomittee"), then announced that the Subcommittee would hold a hearing on the Final Report on Wednesday, May 8, 2013. In his comments announcing the hearings, the Chairman expressed great concern about alarming widespread noncompliance suggested by the Final Report.

This focus on colleges and universities follows reviews by the IRS of several other particular segments of the tax-exempt sector, which reviews often lead to increased regulations and oversight. For example, the IRS issued its Final Report on its Hospital Compliance Project in February 2009, after releasing an Interim Report on the Tax-Exempt Hospitals and Community Benefit Project in July 2007. Closely following this Hospital Final Report, the Affordable Care Act (the "ACA") was enacted in March 2010, adding new requirements that hospitals must satisfy in order to be described in section 501(c)(3), as well as new reporting and excise taxes. The IRS has been working since the adoption of the ACA to revise the IRS Form 990 and the related Schedule H to allow hospitals to report the necessary information, resulting in an enormous administrative burden for both the IRS and the reporting hospitals.

Colleges and universities have been waiting for the Final Report since the related Interim Report was released in May 2010. The Final Report states that "[t]he multi-year project, begun in 2008, included a questionnaire sent to 400 colleges and universities and subsequent audits of 34 selected academic institutions. The final report focuses on the results of these examinations, especially in the areas of unrelated business income and executive compensation." Out of these 400 colleges and universities, "[t]he IRS selected 34 of the 400 for examination because their questionnaire responses and Form 990 reporting indicated potential noncompliance in the areas of unrelated business income and executive compensation."

Examinations of these 34 colleges and universities demonstrated significant underreported, or...