The IRS has commenced mailing its new compliance questionnaire to some 400 colleges and universities. All Section 501(c)(3) organizations, not just colleges and universities, should become familiar with this questionnaire even if they are not the lucky recipient of one. The questionnaire reveals a great deal about the current thought processes of the senior management of the IRS and provides an "early warning" to charities other than the targeted colleges and universities. A copy of the questionnaire can be found at www.irs.gov/pub/irs-tege/sample_cucp_questionnaire.pdf.
Here are a few immediate observations:
- The questionnaire is 33 pages in length and will require extensive administrative, accounting and legal staff time to complete. In this respect, it is akin to the questionnaires sent a short while back to hospitals.
- The questionnaire creates a "trap for the unwary," because the answers provided can come back to be used against the institution in a formal audit. For example, an affirmative response to a question about fringe benefits could be used as evidence of an “automatic excess benefit” if the required documentation is not in the institution’s files.
- The questionnaire uses a broad range of undefined terms to elicit responses. For example, extensive information is required concerning "related" organizations with no clear content for the term "related." The nine-page book of instructions gives examples but not a clear definition of a “related” organization. It includes, among others, a supporting organization and an organization “that conducts joint programs or shares facilities or employees,” potentially a large universe of organizations.
- The questionnaire focuses on three specific areas that have been identified previously as "targets" by the IRS: (a) compensation, especially that provided by related organizations as well as the institution itself; (b) unrelated business income, especially reasons for nonreporting and reasons for loss generation through aggressive cost allocations; and (c) how endowment funds are being invested and used.
- The questionnaire, by implication, calls for much more extensive "policy writing" than has been "recommended" by prior IRS pronouncements. For example, a conflicts of interest policy for trustees and offices should, by implication, be supplemented by a conflict of interest policy for faculty members. As another example, by implication, an institution should have a formal policy requiring "arm's length pricing" in dealing with any related, non-501(c)(3) organizations, such as holding companies or captive insurance companies. (Note: Just because this questionnaire calls for a policy does not mean that a policy is required or even advisable, in our opinion.)
- UBIT exceptions claimed and cost allocation methods used must be identified for an extensive list of activities, including facilities rental, commercial research and computer services.
- The questions about endowments extend to both donor-restricted and board–restricted endowment funds. Monitoring of use consistent with donor restrictions is questioned.
- Detailed compensation information is required for the six most highly compensated trustees, officers and key employees. Some information is required despite the absence of any legal justification, such as the dollar amount of the difference between first class and coach air fares.
- A contact person for “follow up” is to be identified. In our judgment, an institution should name a senior level officer for this purpose, in order to ensure accuracy and care in all responses.