IRS Exempt Organization Office Update on UBITMay 14, 2013
Results from the Colleges and University Project on Unrelated Business Taxable Income (UBTI).
At the end of April each year, the director of the IRS Exempt Organization division speaks to the sector at a Georgetown University exempt organization conference. This year, Lois G. Lerner spoke on April 25th.
Ms. Lerner first explained why the IRS appears to move at a snail’s pace. She noted that the IRS projects are complex, require sophisticated planning, and go through many phases over their lifetimes. They include questionnaire development, statistical sample design, training, data gathering and analysis and, finally exams. As a result, their project work-plans seldom fit into an annual plan and take multiple years to completely play out. So, going forward, the IRS hopes to not only announce the initiation of a project on a particular topic, but to also tell us exactly what work they plan to do regarding that project in the current year.
For example, the IRS just issued their final report on something called the Colleges and Universities Project which was launched in 2008. One of the central issues in this project was Unrelated Business Taxable Income (UBTI). The IRS statistics on UBTI show that only half of the organizations reporting Unrelated Business Income (UBI) are required to pay a tax liability. This is due to the deductions that these organizations are taking to offset the UBI.
In the Colleges and Universities project the IRS conducted 34 examinations and found that UBTI was under reported at 90% of the institutions examined. The under reported taxable income totaled over $90 million and could result in more than $60 million in tax liability for the impacted organizations.
The errors were from claiming losses from activities that did not qualify as a trade or business, misallocating expenses to offset UBI, identifying certain income producing activities as exempt when they were unrelated and erroneously calculating net operating loss carry forward amounts.
Today more and more not-for-profit entities are seeking to create social ventures as a way of raising funds. That is they are trying to expand their tax-exempt mission and earn revenues from the sale of goods and/or services to the general public. Such entities could face significant UBI issues and, while these issues may not be a reason to avoid this type of commerce, it must be entered into with full knowledge of the law and regulations. The IRS colleges and universities project presents evidence that the knowledge of the UBI laws and regulations may be lacking.
Stay tuned for more on the findings from the IRS Colleges and Universities Project.
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