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Washington Highlights

IRS Report Highlights Unrelated Business Income and Compensation Reporting Compliance

April 26, 2013—The Internal Revenue Service (IRS) April 25 released a final report summarizing audit results from the IRS’ colleges and universities study. The final report focuses on reporting of unrelated business taxable income (UBTI), and compensation, including, employment tax and retirement plan issues.

The IRS examination resulted in:

  • Increases to UBTI for 90 percent of colleges and universities examined totaling about $90 million;
  • Over 180 changes to the amounts of UBTI 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.

Primary reasons identified by the IRS include misreporting UBTI due to lack of profit motive or improper expense allocation; errors in computation or substantiation; and reclassifying exempt activities as unrelated.

The report cautions, “Because colleges and universities were not randomly selected for examination, no assumptions should be drawn about the UBI and compensation practices of other colleges and universities based on the examination results.”  However, Lois Lerner, director, IRS Exempt Organizations division stated, “Because these issues may well be present elsewhere across the tax-exempt sector, all exempt organizations need to be aware of the importance of accurately reporting unrelated business income and providing appropriate executive compensation.”

In 2008, the IRS distributed detailed questionnaires to 400 randomly selected colleges and universities. The IRS selected 34 of the 400 for examination “because their questionnaire responses and Form 990 reporting indicated potential noncompliance in the areas of unrelated business income and executive compensation.” The interim report issued in 2010 focused on results from the questionnaires submitted by tax-exempt colleges and universities.

Contact:

Matthew Shick, JD
Director, Gov't Relations & Regulatory Affairs
Telephone: 202-862-6116
Email: mshick@aamc.org

Ivy Baer, J.D., M.P.H.
Senior Director and Regulatory Counsel
Telephone: 202-828-0499
Email: ibaer@aamc.org

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For More Information

Jason Kleinman
Sr. Legislative Analyst, Govt. Relations
Telephone: 202-903-0806
Email: jkleinman@aamc.org