The Taxman Comes to College

The idea of taxing colleges is now apparently no longer confined to one ill-conceived budget plan in Pittsburgh, Pennsylvania. According to an article by Doug Lederman at Inside Higher Ed:

The Internal Revenue Service is focusing mostly on issues related to executive compensation and payment (or non-payment) of tax on unrelated business income in more than 30 reviews it is conducting of individual colleges and universities.

The interim report issued [by the IRS] Friday offered the first official look at the information the federal tax agency has collected from a wide-ranging questionnaire it sent to colleges in 2008 to gauge their compliance with tax laws and identify possible areas for further examination (and enforcement, of course). The IRS focused on higher education… because “colleges and universities make up one of the largest nonprofit segments in terms of revenue and assets” — and that status has made it a target for members of Congress and others in the federal government at a time of ever-tightening federal budgets.

The investigation boils down to this: do colleges use their tax-exempt status to generate income, income on which they should really be paying taxes?

The IRS seemed to be most anxious about unrelated business income, income colleges receive that’s unrelated to education (like, say real estate profits), on which nonprofits are supposed to pay taxes. Many colleges are very, very complex financially and the distinction between related and unrelated business income is often hard for auditors to determine.

This comes at a time of increasingly scrutiny with regard to America’s nonprofit corporations. The New York Times’ Stephanie Strom reported last month that up to one quarter of nonprofits may lose their tax exemptions this year due to a provision that requires all nonprofits to file tax returns.

Read the interim report here.

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Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer