It is not often that the IRS gives us a clear “heads up” as to what are some of its favorite things to “catch” nonprofits doing wrong. But such a heads up has come in its interim report (released May 2010) on research it has been conducting on how well colleges and universities comply with reporting regulations. DO NOT STOP READING THIS JUST BECAUSE YOU ARE NOT A COLLEGE OR UNIVERSITY; THIS APPLIES TO YOU!
The IRS sampled 400 public and private colleges and universities offering four year degrees or higher; they received responses from 344. When I initially read this number, I thought to myself—“Hmm, the other 56 weren’t spooked by the IRS? Wonder what will happen?” The answer? Thirteen of these nonresponders are receiving a full examination by the IRS! (No clue what is happening to the other 43).
So, message #1: when the IRS asks you for something, respond!
While the subjects of this current research were colleges and universities, the IRS has made it clear that the issues uncovered by this research are not unique to this portion of the nonprofit sector. Most importantly, it intends to apply the lessons learned through this research to the whole sector.
So, what piqued the IRS such that it is now going to pay greater attention to these areas for all nonprofits?
- In responding to the survey, colleges and universities reported more unrelated business income—advertising, corporate sponsorship and facility rental—than they reported on their 990-T. (Form 990-T must be completed by every nonprofit earning $1000 or more in gross unrelated business income.) The IRS is now conducting “full examinations” of those schools with discrepancies! Message #2: when sharing information with the IRS—provide the same data to the same questions, regardless of how many times the question is asked or on how many different forms.
- In reporting how much they were paying their highest paid “officer, director, trustee, or key employee” (otherwise known as ODTKE, in the report!), it seems the majority of schools claimed a “rebuttable presumption” in determining the compensation. (Arguing a rebuttable presumption means the school—or any nonprofit—used “an independent body to review and establish the amount of compensation in advance of actual payment, use of appropriate comparability data to establish the compensation, and contemporaneous documentation of the process used to establish the compensation in the particular instance.”) And what this means is that the burden of proofing that the compensation awarded the ODTKE is “excessive” falls to the IRS. (And it seems that everyone and her and his brother want to cry “Excessive compensation!” when it comes to how much the head of a nonprofit is earning.) Obviously, therefore, the IRS would not like an over-reliance on that rebuttable presumption. (Which probably explains why the IRS is also doing a “full examination” of those schools!) Message #3: Truly do your homework in determining your highest paid ODTKE’s compensation, and should you claim a rebuttable presumption, a) be prepared for your “full examination” and b) make sure your rebuttable presumption is solid!
My messages have been, intentionally, a little glib.
So, message #4: be aware! You are on your own. It is a rare oversight agency that is about helping the organizations it oversees. Rather, for the most part, oversight agencies tend to be about compliance: did you dot your i’s and cross all of your t’s? And if not, and here they come down hard, why not? What are you hiding? With what are you trying to get away? How are you trying to cheat?
My final message is anything but glib. The IRS has put the nonprofit sector on notice: the 990 is a serious document; treat it as such!