Community Colleges Internal Auditors

Fall 2013 Conference

Auxiliary/Foundation Reporting and Tax Compliance

Presented By: Heidi E. White, CPA

VAVRINEK, TRINE, DAY & CO., LLP

October 3, 2013

What IS an Auxiliary Organization?

What IS an Auxiliary Organization?Education Code Section 72670 ◦Any entity in which any official of a

community college district participates as a director as part of his or her official position

◦Any entity which operates a commercial service for the benefit of a community college or district on a campus or other property of the district

What IS an Auxiliary Organization?Education Code Section 72670 ◦Any entity whose governing

instrument provides in substance both of the following: Its purpose is to promote or assist a community

college or district, or to receive gifts, property and funds to be used for the benefit of the district or any person or organization having an official relationship therewith.

Any of its directors, governors or trustees are either appointed or nominated by or subject to the approval of the governing board of the District, an official of the district …..

What IS an Auxiliary Organization?

Education Code Section 72670 ◦Any entity which is designated as an

auxiliary organization by the District governing board.

What an Auxiliary Organization Is NOT?

Auxiliary Organizations may not provide or offer instruction --- whether or not state funding is received.

Auxiliary Organizations are not ‘Slush Funds’ to move monies out of the District reporting processes.

Still Not Sure???What are YOU using your

Auxiliary Organization for?

What About the Foundation?Separate Organization from the

DistrictMay - or - May Not have direct

involvement with the District501(c)(3) Organization

recognized by the IRS and FTBAccounting guidance is

contained in the FASB.

Foundation vs. Auxiliary

Foundation Auxiliary Organization

Typically formed to provide financial support to students, programs and services of the district

Fundraising EventsMay not be directly

accountable to the District

501 (c )(3) organization

Typically formed to account for operations of supporting activities of the district

BookstoresShould be directly

accountable to the District

501(c )(3) organization

Accounting, Reporting and Compliance

Both Auxiliary Organizations and Foundations are typically 501 (c)(3) organizations recognized by both the IRS and the State FTB

Donations are tax deductableAccounting guidance is found in

Financial Accounting Standards Board (FASB) pronouncements

Full accrual accounting

Tax ComplianceFederal Form 990 Tax Returns

are due5 ½ months after year end (November 15)

IRS is currently looking at non profit organizations for compliance with tax code.◦Checking websites◦Verifying donors◦Evaluating purpose and types of

revenue received

Tax ComplianceTwo Current Issues Being

Evaluated:1. Cross – State line donor

solicitationsEach state is looking to find organizations that are soliciting donations within the state and requiring them to complete and file individual registration forms

Looking for $$$$

Found through audits of individuals and the reported donations they are claiming.

Alumni living in Arkansas donating and deducting $$$’s to a California College Foundation are audited. That state will now know that the California Foundation has solicited within the state and will send a notice to register.www.multistatefiling.org

Tax Compliance Cross – State line donor

solicitations◦ Definition of Solicitation:

Defined very broadly and will vary between states. Website postings “DONATE NOW” buttons Letters to alumni or Friends of the Foundation

◦ Broad Question “Has someone purposefully directed a charitable

solicitation to a resident of our state?”

◦ Some Exemptions Religious Organizations Colleges and Universities….. Foundations are in a

light gray area

Tax Compliance

2. IRS Colleges and Universities Compliance Project

◦ A multi – state, multi – year project which began in 2008 with questionnaires sent out to 400 College and University not for profit organizations

◦ Subsequent audits of 34 colleges and universities◦ Focus is on Unrelated Business Income◦ Report issued April 2013 and revised in May

2013◦ Reports and other information posted at:

www.irs.gov/uac/Newsroom/IRS-Releases-Final-Report-on-Tax-Exempt-Colleges-and-Universities

Tax Compliance IRS Colleges and Universities

Compliance Project◦ Focus on Unrelated Business Income (UBI)

Income that is subject to tax because the income is not substantially related to the organization’s exempt purpose.

Concern of the IRS is that UBI is generated within not for profit organizations and not reported, or erroneously reported and the tax is not generated

Advertising Facility rentals Food service Golf courses Bookstores Parking lots

Tax Compliance IRS Colleges and Universities

Compliance Project◦ Examinations resulted in 90 percent of the Form

990-T Returns being adjusted. More than 180 adjustments totaling over $90 million in tax revenues.

◦ IRS disallowed more than $170 million in losses and Net Operating Loss carry forwards which may result in over $60 million in assessed taxes

◦ Adjustments were noted for allocations of indirect costs to business operations that were already performing at a loss further exacerbating the Operating Loss carry forwards.

Tax Compliance IRS Colleges and Universities

Compliance Project◦ While this project is going through an appeals

process, it serves as a reminder of the types of compliance issues the IRS is focused on with not for profit agencies

◦ Watch for updates as the findings are vigorously contested by those agencies found to be deficient

Next StepsReview the purpose and

organization of your Auxiliary Organizations.◦Do they continue to serve a need for

the District?◦Are there prohibited or unnecessary

transactions that are going through the Auxiliary Organization?

Next StepsMaintain control over the tax

compliance for the Auxiliary Organizations as well as the Foundations◦When IRS notices are received

contact your auditor ASAP◦Don’t assume notices from out of

state are in error

Any Questions – Comments???

THANK YOU !!