The Internal Revenue Service said it would send compliance questionnaires to about 400 colleges and universities asking about their unrelated business income, endowments and executive compensation practices.
Private nonprofit universities are generally exempt from taxes, the IRS noted, but like state universities, they are subject to unrelated business income tax.
"This effort reflects our work to build a better understanding of the largest, most complex organizations in the tax-exempt sector," said IRS Commissioner Doug Shulman (pictured) in a statement. "The information gathered will help us identify issues and areas that may need more outreach and education or further scrutiny."
The questionnaire will gather information from the schools about how they report revenues and expenses from their trade or business activities, classify their activities as exempt or taxable, and calculate and report income or losses on taxable activities. The questionnaire also will gather information regarding how the organization invests and uses its endowment funds and determines the compensation of certain highly paid individuals.
The IRS said it expects to receive most of the responses within the next several months, analyze the results of the compliance questionnaire and conduct examinations of a sample of the organizations. The IRS anticipates it will issue a report on the project in 2009.
Sen. Charles Grassley, R-Iowa, ranking member of the Senate Finance Committee, backed the IRS initiative. "This questionnaire is overdue," he said in a statement. "Colleges and universities should be much more transparent about their activities, just as tax-exempt hospitals are being asked to do."
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