Thirty-four colleges audited recently by the Internal Revenue Service underpaid their taxes on unrelated business income by nearly $90-million, and nearly 20 percent of the private colleges in the group violated rules for nonprofit organizations in determining the compensation of their chief executives, according to a final report issued on Thursday by the federal agency.
The audits followed up on a 42-page tax questionnaire that the IRS sent nearly five years ago to some 400 public and private colleges. The questionnaire required them to report a wide variety of financial data, including what they spent on perks like housekeeping services for executives, and their income and losses on business activities, like catering services and travel tours, that are not directly related to their higher-education mission.
The goal of the questionnaire was to examine potential discrepancies between colleges’ financial activities and what they reported to the government.
The agency has now issued a final analysis of that questionnaire, focusing largely on unrelated-business income and executive compensation at the 34 colleges that were audited after submitting their questionnaires.
Among the colleges selected for audits, which were not named in the report, the IRS found more than 180 errors in reporting revenue or losses on business income from activities not related to the institution’s academic mission, such as recreation or fitness centers, sports camps, facility rentals, and golf courses.
The reporting errors resulted in a total of nearly $90-million in additional taxes for the colleges that were audited, the report says, because they had counted losses from activities that did not qualify as a business or trade, or because they had counted expenses not connected to the unrelated business.
Compensation Under Scrutiny
Among the private colleges that were audited, nearly 20 percent failed to follow tax rules requiring them to compare the compensation of their top employees to that of similar officials at appropriate peer institutions. Most colleges attempted to conduct such comparisons, the report says, but they relied on figures from the wrong kind of institution or didn’t consider whether the salary comparison included other kinds of compensation.
The perception that college presidents are overpaid, particularly at a time of rising tuition and economic distress, has made higher-education institutions a potent political target.
The audits, the report says, “identified some significant issues ... that may well be present elsewhere across the tax-exempt sector.”
The report warns that the agency will look more broadly at unrelated-business ventures and “ensure, through education and examinations, that tax-exempt organizations are aware of the importance of using appropriate comparability data when setting compensation.”