The Internal Revenue Service (IRS) issued its final report last year summarizing the audit results from its college and university compliance study, which began in 2008. The final report focuses on two primary areas: reporting of unrelated business taxable income (UBTI) and compensation, including employment tax and retirement issues. A previous article summarized the UBTI reporting issues identified in the report. This article focuses on the compensation, employment tax and retirement issues identified in the final report.
As part of the Tax-Exempt Colleges and Universities Compliance Project, the IRS distributed detailed questionnaires to 400 randomly selected colleges and universities. The IRS selected 34 of these institutions for examination because their questionnaire responses and Form 990 reporting indicated potential non-compliance in the areas of UBTI and executive compensation.
The executive compensation component of the IRS exams focused mainly on reasonable compensation issues under Section 4958 of the Internal Revenue Code. Section 4958 provides for an excise tax on officers, directors, trustees and key employees (ODTKEs) who receive payment of unreasonable compensation. An excise tax can also be imposed on those that approve an unreasonable compensation arrangement.
An organization can shift the burden of proving unreasonable compensation to the IRS by following these rebuttable presumption procedures:
While most of the organizations examined attempted to meet the rebuttable presumption standard, approximately 20% of them failed to do so because of problems with their comparability data including:
In addition, many of the examined colleges and universities relied on a survey completed by an independent firm in which their compensation data was included; however, the survey itself was not limited to schools that were sufficiently comparable.
In addition to the comparability issues identified, the IRS also initiated employment tax examinations on 11 of the colleges and universities that were examined. All of the completed employment tax examinations resulted in adjustments. Reasons for the adjustments included the following:
The IRS also opened retirement plan examinations at eight of the universities and colleges being examined, which resulted in deferred compensation-related wage adjustments including:
Based on these audit results, we recommend the following action items:
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