IRS Begins Careful Audits of Universities

The Internal Revenue Service (IRS) is conducting comprehensive audits of several universities nationwide in an effort to crack down on potential abuses of their non-profit, tax-exempt status.

The investigations, part of a new "coordinated audit program," began in September--when teams of IRS agents descended on the campuses of seven universities and requested access to their financial records, according to Marcus S. Owens, director of the agency's Exempt Organizations Technical Division.

Owens refused to identify which schools are currently being investigated. But according to a recent report in the Chronicle of Higher Education, the investigation includes Princeton, Stanford, St. John's, Vanderbilt and Michigan State Universities as well as the University of Michigan and the University of Nebraska.

Owens said that the program is currently in its initial stages. Agents will fan out to other schools as the current audits are completed, eventually investigating between 25 and 40 schools at any given time, he said, adding that each audit could last from one to three years.

Harvard officials said they have not been notified that the University is in line for a coordinated audit and Owens would not say whether Harvard would be targeted.

"Harvard has been audited a number of times by the IRS over the years," said Vice President for Finance Robert H. Scott. "It's what one expects when one is a large complicated business."

"I don't expect anything new," Scott added. "But I also would not expect a decade to go by without some review by the IRS of some activity."

According to Owens, however, the coordinated audits are far more thorough than typical audits the IRS has conducted in the past.

"[The new program] is an effort by thegovernment to take care of what was probably anoutdated system of tax administration in which yousent one revenue agent, who was increasingly metby a phalanx of [lawsuits], trying to grapple withexceedingly complex tax issues by himself orherself," Owens said.

The intention, Owens said, is "to ensure thattax exempt entities are continuing tooperate...for the purpose that Congress intendedthem to operate, as opposed to becoming businessesor...undertaking activities that the internalrevenue code says would generate taxable income."

Owens said that the IRS would focus onuniversity activities that generate revenue notclearly linked to the school's non-profit mission.

Those activities could include joint ventures,limited partnerships, wholly or partially ownedsubsidiaries and offshore ventures, as well asticket and concession sales at sporting events.

Ads Could Draw Scrutiny

In addition, sales of advertising in universitypublications and services such as printing,catering or computer time to non-universityaffiliates--which are supposed to be taxed undercurrent law--could draw added scrutiny.

"We're looking for areas of non-compliance withthe tax code and those could range from thediversion of money, which is pretty serious,through less serious problems [regarding the]unrelated business income tax," Owens said.

High salaries in certain university divisionscould attract scrutiny, he added.

"We look at a laundry list of factors in tryingto identify whether compensation is reasonable ornot," Owens said. "What we look at is...what arethe qualifications of the individual, what do theydo for that money, is their contract reduced towriting, what has been the historical compensationof that individual and what do individuals incomparative positions at other institutionsreceive for that job."

Owens said the current audits have alreadyuncovered some areas of noncompliance.

"What we've found in some cases is thatsubsidiaries are being used to pay compensation tothose in positions of influence in theorganizations," he said.

Officials: Audits Waste Money

In interviews with the Chronicle of HigherEducation, some officials at the universities nowunder investigation said they were concerned thatthe extensive audits would waste money and timeand result in the universities' paying highertaxes.

"It's our sense that the IRS is looking forways to increase revenue to the federalgovernment," said Walter L. Harrison, aspokesperson for the University of Michigan.

According to Peter Van Etten, Stanford's chieffinancial officer, Stanford has assigned a senioruniversity financial official to work full time onthe audit with the IRS agents.

Owens told The Crimson that adding revenue isnot a primary mission of the coordinated auditprogram.

"I don't think the intention in this area oftax administration is to balance the budget,"Owens said.

Scott said that he is not overly concernedabout the implications of a potential audit ofHarvard, adding that the University currently doespay taxes on unrelated business income.

"[The IRS has] a right to ensure that everyinstitution and individual who owes federal incometaxes is paying them," he said. "We believe thatwe are and we work very hard to make sure that wedo."

Scott said that, if audited, Harvard wouldcomply with any reasonable requests forinformation on its finances.

Still, he added, "If they came up with afinding that we didn't agree with, we'd contestit.

"[The new program] is an effort by thegovernment to take care of what was probably anoutdated system of tax administration in which yousent one revenue agent, who was increasingly metby a phalanx of [lawsuits], trying to grapple withexceedingly complex tax issues by himself orherself," Owens said.

The intention, Owens said, is "to ensure thattax exempt entities are continuing tooperate...for the purpose that Congress intendedthem to operate, as opposed to becoming businessesor...undertaking activities that the internalrevenue code says would generate taxable income."

Owens said that the IRS would focus onuniversity activities that generate revenue notclearly linked to the school's non-profit mission.

Those activities could include joint ventures,limited partnerships, wholly or partially ownedsubsidiaries and offshore ventures, as well asticket and concession sales at sporting events.

Ads Could Draw Scrutiny

In addition, sales of advertising in universitypublications and services such as printing,catering or computer time to non-universityaffiliates--which are supposed to be taxed undercurrent law--could draw added scrutiny.

"We're looking for areas of non-compliance withthe tax code and those could range from thediversion of money, which is pretty serious,through less serious problems [regarding the]unrelated business income tax," Owens said.

High salaries in certain university divisionscould attract scrutiny, he added.

"We look at a laundry list of factors in tryingto identify whether compensation is reasonable ornot," Owens said. "What we look at is...what arethe qualifications of the individual, what do theydo for that money, is their contract reduced towriting, what has been the historical compensationof that individual and what do individuals incomparative positions at other institutionsreceive for that job."

Owens said the current audits have alreadyuncovered some areas of noncompliance.

"What we've found in some cases is thatsubsidiaries are being used to pay compensation tothose in positions of influence in theorganizations," he said.

Officials: Audits Waste Money

In interviews with the Chronicle of HigherEducation, some officials at the universities nowunder investigation said they were concerned thatthe extensive audits would waste money and timeand result in the universities' paying highertaxes.

"It's our sense that the IRS is looking forways to increase revenue to the federalgovernment," said Walter L. Harrison, aspokesperson for the University of Michigan.

According to Peter Van Etten, Stanford's chieffinancial officer, Stanford has assigned a senioruniversity financial official to work full time onthe audit with the IRS agents.

Owens told The Crimson that adding revenue isnot a primary mission of the coordinated auditprogram.

"I don't think the intention in this area oftax administration is to balance the budget,"Owens said.

Scott said that he is not overly concernedabout the implications of a potential audit ofHarvard, adding that the University currently doespay taxes on unrelated business income.

"[The IRS has] a right to ensure that everyinstitution and individual who owes federal incometaxes is paying them," he said. "We believe thatwe are and we work very hard to make sure that wedo."

Scott said that, if audited, Harvard wouldcomply with any reasonable requests forinformation on its finances.

Still, he added, "If they came up with afinding that we didn't agree with, we'd contestit.