|
As we move from tax season to fiscal year-ends for many non-profits, we wanted to bring to your attention that late last week the IRS issued a report on a significant examination/audit project that the IRS had undertaken pertaining to higher educational institutions, focusing on Unrelated Business Income and Executive Compensation issues.
As a service to our, clients and friends, we have prepared an executive summary of the report below with a link to the full report embedded in the summary. Traditionally, the IRS has used projects like this as a basis for future industry-wide audit initiatives, so if you are preparing IRS Form 990s and returns for unrelated business income, it will be helpful to review these issues and consider being proactive to ensure compliance should an audit occur in the future. If you have any questions or concerns, please feel free to give me a call. If there is anything we can do to assist you or clients in this area, we'd be happy to do so.
For your future planning, please note that the Tax Practice Group will be offering a number of New Hampshire tax seminars in the months of May and June. On August 16th we will also provide a complimentary eight (8) hour seminar entitled Taxation of Businesses & Their Owners for Inexperienced Staff geared for new professional staff with a year or less of state tax experience. For more information on these seminars, please visit our Web site periodically to review a full list of seminars that our firm will be presenting this year. New seminars may be added throughout the year.
Learn more about Devine, Millimet & Branch Professional Association at www.devinemillimet.com. Our e-mail alerts are sent to clients and friends and may be considered advertising. Click here to unsubscribe.
Jason
Jason E. Cole, Esq., CPA
603.695.8566
jcole@devinemillimet.com
TAX PLANNING IN 2013
In 2008 the IRS began an examination project of higher educational institutions by sending out questionnaires to randomly selected colleges and universities throughout the country. The primary issues identified in that process had to do with unrelated business income ("UBI") and executive compensation. A further sample (of 34 schools) was selected for examination and this week, with more than 90% of those examinations complete, the IRS has released its Final Report.
The findings of the Final Report provide a glimpse of the areas for which the IRS and state Attorney General offices may scrutinize over the next couple of reporting cycles making it advisable and prudent to take a look at your organization's audit risk and consider being proactive in ensuring that existing tax positions are supportable or perhaps corrective measures may be worth looking into to fill holes which the IRS could use to make adjustments.
As the Final Report sets out in greater detail:
Increases to UBI for 90% of colleges and universities examined totaling about $90 million; Over 180 changes to the amounts of UBI reported by colleges and universities on Form 990-T; and Disallowance of more than $170 million in losses and net operating losses ("NOLs"), which could amount to more than $60 million in assessed taxes.
The primary reasons for increases to UBTI were noted as follows:
IRS disallowed expenses that were claimed to be connected to unrelated business activities, but were not. This misreporting occurred for two main reasons: (1) lack of profit motive; and (2) improper expense allocation. The IRS found that organizations were claiming losses from activities that did not qualify as a "trade or business." A pattern of recurring losses indicates a lack of profit motive—i.e., that the taxpayer engaged in the activity without the requisite intent for a trade or business of making a profit— and nearly 70% of examined colleges and universities reported losses from activities for which expenses had consistently exceeded UBI for many years. IRS also found that on nearly 60% of the Form 990-Ts examined, colleges and universities had misallocated expenses to offset UBI for specific activities. NOLs were either improperly calculated or unsubstantiated on more than a third of returns, resulting in the disallowance of nearly $19 million in NOLs. Nearly 40% of colleges and universities examined had misclassified certain activities as exempt or otherwise not reportable on Form 990-T.
As a result of these findings, The IRS plans to look at UBI reporting more broadly, especially at recurring losses and the allocation of expenses, noting that these issues may be present elsewhere across the tax-exempt sector.
With respect to compensation, although most private colleges and universities examined attempted to meet the rebuttable presumption standard, about 20% of them failed to do so because of problems with their comparability data, including:
Use of institutions that weren't similarly situated, based on: location, endowment size, revenues, total net assets, number of students, and/or selectivity; Failure to document selection criteria for the schools included or explain why they were deemed comparable; and Compensation surveys that failed to specify whether amounts reported included only salary or also other types of compensation.
The average base salary for the top management official of colleges and universities (generally, the president), both public and private, was $448,981, with a median base salary of $363,943. Average total compensation was $561,135, with a median total compensation of $458,152.
The IRS also looked at the average compensation of non-officer, director, trustee or key employees. These included sports coaches ($884,746), investment managers ($894,214), department heads ($229,770), faculty ($575,632) and administrative/managerial ($462,872).
The IRS examined the employment returns for about a third of the colleges and universities, and found that all the exams resulted in adjustments in wages, leading to assessment of tax and, in some cases, penalties. Wage adjustments totaled about $36 million, while taxes and penalties amounted to over $7 million.
The IRS looked at retirement plan reporting at about a quarter of the colleges and universities and found problems with about half. The exams resulted in increases in wages of more than $1 million with assessment of more than $200,000 in taxes and penalties.
As a result of these findings, the IRS plans to ensure, through education and examinations, that tax-exempt organizations are aware of the importance of using appropriate comparability data when setting compensation.
With one of the largest and most diverse non-profit practices in the State, Devine Millimet has the experience and expertise to guide you, your organization and your governing board through these issues. We can help ensure your compliance with the technical requirements in each of these areas and assist in developing sound and reasonable solutions in line with your organization's strategic goals. If you have any questions with respect to these issues, need assistance with your reporting or corporate governance, document review or drafting, or would like counsel in response to an inquiry from a federal, state or municipal regulatory agency, please give us a call. We look forward to speaking with you.
This document is prepared as a service to clients and other friends of Devine, Millimet & Branch, Professional Association to report on recent developments. The information contained herein is general and should not be relied upon as legal advice.
United States Treasury Regulation Circular 230 requires that we inform you that, unless expressly stated otherwise, any United States federal tax advice contained in these materials is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any tax penalties imposed by the Internal Revenue Code of 1986, as amended.
.....
The Devine, Millimet & Branch Tax Group offers this free E-Mail Alert service to provide information on recent developments in tax law. If you have any questions about this e-mail, or if you know of anyone else who may be interested in receiving these alerts, please send us an email at mgilbert@devinemillimet.com.
This E-Alert is provided for informational purposes only. It is not intended to serve as legal advice or legal opinion. Devine, Millimet & Branch, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such. Our attorneys are available to assist tax payers in their compliance efforts and to represent tax payers in matters before state and federal courts and administrative agencies. For more information, please contact the attorney(s) listed or the Devine Millimet attorney or tax professional with whom you regularly work.
© Copyright 2013 Devine Millimet & Branch, Professional Association
|
