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CHAPTER 12

TAXATION AND REPORTING

EVERYTHING A BUSINESS OFFICER ALWAYS WANTED TO KNOW ABOUT TAXES

IN THIS CHAPTER:

Establishing a Tax Compliance Program The Tax Calendar The Different Types of Taxes A Closer Look at UBIT

Contributor: Steve Hoffman (Suggest using something like this: Steve Hoffman, The Tax Translator – o Steve Hoffman, Tax Advisor for NBOA Members)

GETTING A HOLD ON THE PROCESS

The Internal Revenue Service (IRS) is an independent school’s largest vendor. The amount of funds flowing out of a school for tax obligations can equal 15 percent of the total budget. This includes all taxes paid: withheld federal, state and local taxes, taxes withheld and paid for international students, sales tax, excise taxes and unrelated business income tax (UBIT).

Even with all those tax liabilities, many independent schools have never had difficulties with the IRS. They may have never received a notice assessing a penalty or advising them of an audit. The fact is, however, that all schools need to resist complacency and implement a solid tax compliance program. Schools that fail to adopt this approach risk IRS scrutiny—as well as damage to their finances and reputations.

ESTABLISHING A TAX COMPLIANCE PROGRAM

The chart below shows the six basic steps that will lead a school toward tax compliance:

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( Can we add something like this? Copyright, Steve Hoffman, The Tax Translator, 2013?) All steps to the top of the pyramid are designed to ensure that independent schools are complying with federal, state and local tax requirements and to help them establish an audit defense if needed. Before exploring these six steps, however, business officers should first look at where their schools stand on the following scale in terms of tax compliance:

Same as above – Copyright Steve Hoffman, The Tax Translator, 2013 The Random Phase represents a business officer who, as chief financial officer, has little or no knowledge about tax law compliance. He or she may not know who prepares tax returns or makes the tax deposits. The school may also lack tax policies and procedures. Business officers in the Random Phase may “feel” that their school is in compliance with federal, state and local tax laws, but have no way to prove it.

In the Emergent Phase, the school has someone who acts asa tax manager, who takes care of tax issues, or most oftenperhaps a designated tax person who has tax responsibility as an “other duty as assigned.” Most often, this task falls to the controller or an assistant business officer for whom this falls into the category of “or other duties as assigned.”. In those cases, the CFO should meet with the designated tax managerat individual to assess his or her awareness

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Audit

Defense Audit

Defense

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of tax issues and tax law changes that affect the institution, as well as the controls the acting tax manager has put in place to see that there are no late deposits or missed filings.

Schools at the right end of the scale are in the Excelling Phase. Their business officers are aware of tax issues, know how to address them and have the information they need to defend the school against penalties or audits. This elevated state is where thought leaders in business and finance operational efficiency dwell.

STEP ONE: AWARENESS Business officers, whether experienced or new to the job, will find the following five tasks essential to achieving awareness of tax compliance issues.

Task 1: Look at Management

Business officers need to determine who is managesing their school’s tax compliance program, as well as who else is knowledgeable about tax issues that affect the school and who manages and prepares tax returns and reports.

At a smaller school without a tax manager or a designated tax person, tax compliance may be disbursed throughout the organization. For instance, payroll staff may deposit employment taxes as well as sign and file employment tax returns. Accounts payable may be in charge of 1099 forms for independent contractors. At a larger school with a tax manager or even a tax department, the business officer should meet with the designated tax manager to ask what he or she sees as the biggest tax risks to the school, and together create a visual matrix of those risks. This can be as simple as the image below.

NRA Employment I/C -Employee UBIT Sales0

102030405060708090

100

Tax Risks

Can we add the Copyright for this graphic also? This type of presentation will reveal areas that need improvement—in this case, sales tax and UBIT. The business officer’s next move is to ask the tax manager or the pperson responsible for these areas tax management function what he or she sees as the first steps to take and what obstacles exist. Then the business officer, as CFO,

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moves to remove those obstacles. In some cases, the business officer might have to be persistent to gain the cooperation of the various departmentsfunctions.

Task 2: Develop a Team Approach

Business officers should consider starting quarterly tax update meetings involving the departments functions that deal with tax issues, including accounting, human resources and financial aid. Using their input, the business officer can develop a yearly tax calendar that lists all known tax filings, who is responsible for those filings and the due dates for all returns and deposits (see sidebar). The tax team should review this calendar at each quarterly meeting to ensure that no filings or deposits are missed.

DESIGN: TAX CALENDAR NEAR HERE I Agree – Tax Calendar here!!

Business officers should not be surprised if their colleagues resist this level of oversight. To prevent pushback, prepare for the question, “What’s in it for me?” For academic departments, the benefit could be that the money saved on penalties and interest can now go to programs. Administrators would benefit from spending less time on IRS inquiries.

The financial costs of an exam by the IRS can be harsh, especially when considering potential penalties and interest. The IRS can audit for three years prior plus the current year, which, in reality means that a $1 million per year IRS assessment can cost up to $4 million on one issue alone. In addition, a school’s reputation can be damaged from an IRS examination becoming public knowledge. Such news has an impact on donors, enrollment and jobs.

Task 3: Assess Risk

Most independent schools perform a campus-wide risk assessment, yet these studies tend not to include tax risk or input of the designated tax manager (if the school has one). Given the potential for financial and reputational hits a school faces, any risk assessment should include the school’s strongest and weakest tax compliance risks. For instance, it might rate areas such as payroll tax, reporting, UBIT and independent contractors as high, medium or low risks. Here are suggested tax risks for consideration and review, along with the responsible departmentoffices and steps needed to reduce the tax exposure. The grid lines did not print out when I printed that – suggest they be present in the book as they make it easier to read.

Issue DepartmentOffice Mitigation

(Policies)

Tax-exempt bond compliance General counsel

Treasurer

Guidelines on debt

Tuition/ educational assistance program

Human resources Employee handbook

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Benefits administration Policy—taxation of employee tuition benefits

Prizes and awards to employees

Accounts payable

Payroll services

Tax departmentBusiness office

Policy—taxation gifts, prizes and awards to employees

Record retention for tax records

Tax departmentBusiness office

Policy—records management

Employee versus independent contractor

Business officeTax department

Procurement

Accounts payable

Policy—worker classification

Federal, state payroll tax withholding and reporting

Payroll services

Business officeTax department

Policy

Tax calendar

W-2 and W-3 reporting Business officeTax department

Payroll services

Information systems

Tax calendar

Nonresident alien (NRA) taxes, withholding

NRA reporting

Business officeTax department

Payroll services

International students

Procurement

Policy

Tax calendar

W-9 collection Accounts payable Policy supplier registration

1099 reporting Accounts payable Tax calendar

Taxability of fellowships and other forms of financial aid

Business officeTax department

Student financial assistance

Accounts payable

Policy—taxable and nontaxable payments to students

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Imputed interest on employee loans

Payroll services Policy—employee loan policy

Taxability of meals and lodging furnished to an employee

Business officeTax department

Payroll services

Accounts payable

Procurement

Policy

Accountable plan—business expense reimbursement

Accounts payable

Business officeTax department

Payroll services

Policy--travel and entertainment

Procurement card

Allowable automobile mileage rates

Accounts payable Policy—travel and entertainment

Personal use of school owned automobiles

Payroll services Employment taxes and fringe benefits

Unrelated business income tax

Business officeTax department

Policy—unrelated business income tax

Tax calendar

Advertising income Business officeTax department

Policy—commercial advertising

Unrelated business income tax

Sales tax Business officeTax department

Policy—sales tax collection Reporting and remittance

Tax calendar

Exempt organization tax return

Form 990

Business officeTax department

Policy—I-90 disclosure procedure

Tax calendar

Charitable contributions Development

Business officeTax services

Policy

Gift acceptance

Gift processing

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Reporting receipt of cash greater than $10,000

Cashier’s office

Business officeTax department

Policy

Foreign bank account reporting

Business officeTax department

Policy

Political activity prohibition TBusiness officeax department

Policy

Cell phones, iPads, laptops Business officeTax department

Policy

Sales tax-exempt purchases Business officeTax department

Accounts payable

Expenditure of funds

Who should set the degree of risk for the school? Managers will say it’s their responsibility, but the issue is one the school’s board of trustees should consider. The worst time to let the board know of a potential tax risk is when the IRS is coming.

Task 4: Review IRS Communications

If the school has someone at the school other than the business officer who acts as a tax manager, he or she should be directed to show the business officer every piece of correspondence from any taxing authority. In the absence of a tax managersuch a position, the business officer should receive that correspondence.

It may seem obvious—but whoever is designated to receive tax-related correspondence should open the envelope or email and get to work on handling the request or recording the information. Sometimes people become ffearful for their jobs and do not want to bring their mistakes to the attention of their supervisor, thus letting sensitive response deadlines pass. To prevent these lapses, give the IRS and other taxing authorities information about the office and individual where to whom any correspondence should be directed. The tax officeis individual should be the only point of communication, written or verbal, with the IRS or other taxing authorities. This policy prevents confusion about who is to take the next step and what that next step should be.

If the school does not have a designated tax manager position, the business officer as CFO or controller should act as the point person. That person should also communicate tax issues upward to the head of school and relevant trustees such as the board and finance chair. The school may want to seek outside legal or consulting help if the tax issue is serious—that is, if it involves an audit or has potential for large penalties.

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Many Sindependent schools do not have a dedicated tax manager. With budget constraints it may not be possible to justify a new position, but schools should centralize tax functions to the greatest extent possible. At the very least, the business officer must be aware of who has the responsibility for making deposits, preparing returns, filing returns and communicating tax information within the school and with tax authorities. The business officer also needs to follow up with responsible parties at meetings throughout the year. When responsibility for taxes is decentralized, as it is at many schools, accomplishing these tasks might be more difficult. It’s the business officer’s job to see that all tax obligations are fulfilled, even when the return is not prepared by the business office or within its span of control.

Task 5: Build a Team

It's not necessary for the business officer alone to have an in-depth knowledge of all these tax issues. After developing the tax team, the business officer can ask personnel which taxes they currently file and pay and then follow up with one more question: Are they aware of any other taxes that the school should be filing and paying? The answers may be surprising. Some staff members may not know they should make particular tax filings because no one has ever asked them about them. Or perhaps they were told not to worry about them or they simply were not aware of the various activities that are subject to taxation.

Once the business officer has accomplished these steps to make everyone aware of tax compliance issues—and has become the visible tax advocate for the school—it’s time to move on to Step Two of the pyramid.

STEP TWO: IDENTIFICATION

The saying “compliance breeds compliance” means that the business officer has educated the independent school community about the impact of tax issues and continues education throughout the year. The more compliance improvements the business officer makes, however, the more compliance issues he or she seems to find. It’s better to identify tax issues first than to have the IRS find them—and charge penalties and interest for its discoveries.

The tax committee is the first step toward identifying tax issues. An independent school should include community members who can identify weaknesses in the tax compliance program. The committee can include representatives from payroll, human resources, accounts payable and financial aid, among other departmentsfunctions.

Tax compliance is a concern for the entire school; it’s not just a business and finance division thing. Taxes are a shared responsibility that extends to the academic side of the house. For instance, schools frequently sell books or periodicals with advertising in them, such as yearbooks and athletic guides. This advertising is subject to UBIT. Or consider the school band, which might sell CDs of its music without collecting the state sales tax. By including the entire community, the business officer can find allies in promoting a commitment to tax identification.

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The Different Kinds of Tax

Every independent school is subject to several kinds of taxes. They all have different filing requirements, different due dates and different deposit dates. Not only does the business officer need to have a list of various kinds of taxes, he or she needs to find out who is responsible for completing filings, reports and payments for each one. Here are the basic taxes that schools commonly face.

Employment Tax: Employment tax is withheld from employees’ wages, a function typically performed by the payroll departmentstaff. The business officer or designated tax manager must determine who is responsible for making deposits and check whether any deposits have been missed or any penalties have been incurred. Returns must be filed quarterly, so it’s important to know who prepares and who signs those quarterlies. Ask whether the forms have ever been filed late, whether any penalties have been incurred and whether corrected forms have been filed. In addition, the school should have a backup plan if the person responsible for handling employment tax duties is unavailable. At one school, that employee was out on sick leave the day the deposit was due and no one else knew how to perform that task. The school was liable for $50,000—the IRS penalty for being one day late.

Unrelated Business Income Tax (UBIT): UBIT is a tax on all revenues a school brings in that are not substantially related to its mission and purpose of education. It includes activities such as room rentals, facility rentals, advertising and even cell phone towers. Many activities occur around campus that may become subject to UBIT. (See sidebar for more information on UBIT scenarios.)

Perhaps the best way to identify UBIT at a school is to develop an annual UBIT questionnaire for all departments and then analyze the responses. Examples of UBIT questionnaires are available at the author’s website, www.TheTaxTranslator.com. (The link to take the reader directly to a UBIT Questionnaire is the same as above but with a /ubit after the word com) Another way to identify UBIT is to determine the location of all the credit card “swipe” machines on campus. Their presence means the department is selling something is being sold, and when a department sells something,this is the case there may be it could mean there is some potential for UBIT.

Nonresident Alien Tax (NRA): “Nonresident alien” or NRA is IRS talk for a school’s foreign students, faculty and staff. Keep in mind that the school—not the individual—is liable for the tax, since the school is the withholding agent. Nothing that business officers know and love about the U.S. tax code applies to a school’s foreign students. For instance, some cannot take itemized deductions. They can’t use Form 1040 (they use Form 1040-NR). Some can't claim their dependents, and some require an additional amount to be withheld on top of the already highest single rate ofr withholding. Further, all non-educational awards and prizes provided to foreign students are subject to tax on the first dollar.

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Business officers should communicate with the individuals who department that serves the school’s nonresident aliens. Chances are this department ishese professionals are extremely familiar with immigration procedures but lacking in tax knowledge. In some schools, the admissions office may keep files for international students, but tax forms may be payroll’s responsibility—a setup that can result in miscommunication. The business officer needs to bring these two offices together to identify and remove any obstacles to tax compliance.

Sales Tax: Some independent school staff might be confused when the business officer cautions them to be aware of sales tax obligations. “Really? Aren’t we tax exempt? We don't have to collect sales tax on the items we sell!” might be one reaction, or, “We only sell to students, so we wouldn’t collect sales tax from them.” Students are not tax-exempt.

Unless an independent school is selling to another tax-exempt organization, it must collect sales tax from the buyer at the time of sale. Selling to a tax-exempt organization requires a tax exemption certificate at the time of sale.

Most state and local sales tax codes define taxable items as “tangible personal property.” Simply put, if an item can be handed across a counter, it most likely is subject to sales tax. Items within that definition vary widely from jurisdiction to jurisdiction, making a comprehensive list of taxable items impossible to compile. A good rule is to charge sales tax on any item that, if purchased at a store, would require sales tax.

To determine where sales tax applies at schools, business officers can look for credit card swipe machines on campus. Those devices usually signal that the school is selling something that may be subject to sales tax. Another good way to determine sales tax liability is to walk around campus and check what is being sold where—perhaps school supplies or a snack bar. If the school operates in more than one state, it may have to file sales tax in all those states.

Schools should centralize sales tax responsibilities, assigning them to the tax departmentbusiness office or the person designated to handle tax matters. Business officers should make sure that person stays up to date on sales tax changes, which can change once a year and sometimes even twice a year, depending upon state voting days and special ballot issues. Some states offer a sales tax holiday during which sales tax should not be collected on certain items sold.

Schools should also explore obtaining exemptions from paying sales tax in other states by applying for sales tax exemption certificates. The exemption applies to staff, including academic staff, when traveling for conferences or training, and to students traveling for school-sponsored athletic or academic purposes. As the school gathers these exemption certificates, the business officer or tax manager should notify the accounts payable and procurement departments that sales tax is not due on purchases made in those states.

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Tax-Exempt Financing: Schools that issue tax-exempt bonds face another tax compliance risk. The IRS can audit bond issuances. In this case, it is necessary to keep records for the life of the bond, often as long as 30 years.

Schools must also be aware of the tax consequences of UBIT if non-tax-exempt activities occur in tax-exempt financed buildings on campus. The IRS refers to this as unrelated debt-financed income. Congress set out to tax, as unrelated business income, the investment income from property a tax-exempt organization acquires using borrowed funds. In general, this designation applies only if the property involved is “debt-financed property.” Property can be real, tangible or intangible. If the property is substantially used to further the exempt organization’s exempt purposes, then it is not treated as debt-financed property. The IRS has defined “substantially” as 85 percent. (See Chapter 4 for an in-depth discussion of tax-exempt financing.)

Overseas (International) Tax: An independent school may desire an international presence. For those schools, it’s important to remember that having nonprofit status in the United States does not mean the school will be considered a nonprofit entity overseas. However, in some jurisdictions, a school may apply for tax-exempt status in that country, which is not a problem with the IRS as long as the school’s activities abroad are consistent with its tax-exempt purpose.

It takes only a single employee to set off significant legal and financial obligations for a school. Formal registration might be required with an appropriate government ministry. A school may create what’s known as a “permanent establishment” that can, in some countries, subject all the revenue earned in that countrythere to tax in that country.

If a school requires the services of a local national, such as a language instructor, to conduct the activity, then his or her legal employment may require an employer-identification number. That number cannot be obtained without formal registration with the local government. As a general rule, retaining and compensating a local national in a foreign country will very likely trigger a duty to register for payment of tax and other reporting obligations in that country.

American employees working overseas need the correct visa to work legally. Sending a faculty member to work in a foreign country without the proper work authorization can result in his or her immediate detention or even deportation, potentially leaving students without supervision. If a school hires foreign nationals in their country, the school may become subject to that country’s sometimes-generous health, retirement and social welfare plans. Sometimes these other costs can add up to 50 percent of salary.

In addition, even U.S. citizens who work overseas may be eligible for certain foreign labor union benefits. It’s also not automatic that a school can deposit the paycheck of a U.S. citizen working overseas into a U.S. bank account. After 183 days, the employee is deemed a tax resident of that country and the school must deduct and pay to the foreign authorities the appropriate amounts for income tax and other required payroll-related items.

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Independent Contractors: Independent contractors are a part of every audit the IRS conducts. Who at the school decides whether to pay someone as an independent contractor or an employee? That person needs training on how to make the correct decision and avoid costly classification mistakes. The IRS has issued broad general guidelines over the years for determining independent contractor status. One IRS definition says:

“…generally, the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished.” (Section 31.3121(d)-1(c) (2) of Internal Revenue Code.)

The IRS also has created Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, which covers financial controls, behavioral controls and the relationship of the parties. (sSee http://www.irs.gov/pub/irs-pdf/fss8.pdf). Even within this publication (the SS-8 is a Form with instructions, not a publication if that is an issue?), the IRS states that no one area may indicate whether or not the individual is an independent contractor or an employee. (See Chapter 10 more information on independent contractors.) Can I ask who wrote a Chapter on Independent Contractors? And may I review it?

Employment Tax and Fringe Benefits: In most cases, school payroll departments offices do a good job of handling run-of-the-mill federal, state and local tax withholding, thanks to excellent payroll software now available. However, in prior years, significant changes to federal withholding and Social Security taxes have come and gone according to the whim of Congress. For instance, in 2011 and 2012 the government reduced by 2 percent the amount of Social Security tax to be withheld from employees’ wages. In 2013, it increased by 0.09 percent withholding on employees earning more than $200,000 a year by 0.09 percent. These changes, if not implemented correctly, can result in significant cost in penalties and interest.

Fringe benefits may be taxable or nontaxable. While most heads of school and department heads would like those benefits to be nontaxable, it’s wise to consult the IRS’ annual guide on taxable and nontaxable fringe benefits. The IRS defines fringe benefits as any property or service (or cash under certain circumstances) provided to an employee in addition to or in lieu of regular wages, and it states that those items would be a taxable fringe benefit to the employee unless specifically excluded by statute. For instance, the IRS considers gift cards the equivalent of cash. Providing gift cards to an employee creates a tax liability for the school because the value is not reflected on the employee’s W-2.

Employers must report taxable fringe benefits to employees on Form W-2 and taxable fringe benefits to independent contractors on Form 1099-M. Fringe benefits include accident and health benefits, achievement awards, adoption assistance, athletic facilities, de minimis benefits, dependent care assistance, educational assistance, employee discounts, group term life insurance coverage, lodging on school premises, meals, moving expense reimbursements,

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no additional cost services, transportation or commuting benefits, employer-provided cell phones, tuition reduction and working condition benefits.

Excise Tax: Many people don't consider excise tax as relevant to a school’s tax compliance program, but here are some ways to identify it. For example, if a school is large enough to have its own shuttle bus service, those buses may run on diesel fuel. The school may be exempt from federal excise tax on purchases of fuel for the school.

STEP THREE: COMPLIANCE

Compliance is the recurring effort to achieve all of a school’s tax reporting obligations in a timely manner. Business officers can accomplish this with well-defined policies and procedures, but they can falter if they don’t pay attention to changing laws. This section shows areas for improvements in policies and addresses some common types of non-compliance.

Compliance is ongoing. Tax decisions are made every day—for instance, when in which a transaction requires triggers sales tax, every time employees are paid, each time an activity is subject to UBIT. The tax team working with the business officer or tax manager controller assures that those obligations are met.

Tax compliance is essential—school administrators should not assume they can ignore compliance just because the school is audited every year by a CPA firm or has never been the subject of an IRS audit. Business officers also should not assume that the CPA firm that performs the audit and supplies the board with audited financial statements will uncover tax issues. That task is not part of the firm’s responsibilities.

Policies

Policies are essential, but they must be monitored and enforced. Business officers need to determine who “owns” tax policies because they sometimes span many departmentsfunctions. Even when not under the control of the tax department, there are policies that have tax consequences and need to be considered from a tax perspective. Here are the top 10 areas for tax-related policies and procedures for at schools, based on an informal survey by the author:

1. Travel2. UBIT3. Non-resident alien (NRA)4. Sales tax5. Awards and prizes6. Moving and relocation expenses7. Reimbursements8. Cell phones9. Foreign national employees10. Honoraria

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Other policies schools may wish to add to the list include tuition reductions, Form 1099 reporting, commercial advertising, joint ventures with for-profit entities, gifts and prizes to employees, and hiring and paying service providers abroad.

The business officer or tax manager should keep all written tax policies current, marking them with the date created and annual review date. These policies are like a roadmap for your school on how to do things correctly. Without them, the school reveals weaknesses to the IRS and other tax authorities.

Enforcing Policies

Current, updated polices are important, but they also must be enforced. Remember this: “Trust is not a control.” Resistance is common, since adhering to a tax compliance program often means a change, but business officers must reject the “that’s the way we’ve always done it” response. The business officer can become a tax advocate by including tax discussions in administrative meetings and educating staff members at special meetings. Tax compliance cannot be achieved if its responsibilities lie solely with the business office. It needs to be advertised. It’s about building a tax team, inviting tax to the table and taking an active management role in taxes for the school.

STEP FOUR: REPORTING

Reporting a school’s tax obligations to the IRS and other tax authorities occurs more than once a year. A school is at risk if tax decision makers do not know when these reports are due and who is completing them. It is critical to have a control mechanism like a tax calendar to monitor all tax reporting obligations.

The business officer or other tax manager’s ultimate goal is to provide the correct information on a timely basis to the federal, state and local governments. That work entails more than the financial work done at the end of the year in various departmentsamong various staff on campus, —and it requires collaboration among many different departments on campusthem.

Generally, reporting work begins once the school has made all tax deposits due throughout the quarter or year and has begun gathering all information necessary to complete the appropriate IRS tax forms. For instance, reporting required for foreign students is a yearlong view of all payments made to international students, scholars and researchers. These payments are all summed up on the Form 1042 that must be filed with the IRS annually. The employment tax form, however, is a quarterly filing. Thus, tax is not an annual event. It occurs daily, weekly, monthly, quarterly, semiannually and annually.

Schools must complete some reporting obligations at calendar year-end and some at fiscal year-end, but many other reporting requirements exist, too. Reporting to the IRS by making deposits of tax and filing forms is a specific form of compliance that the government requires.

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The following paragraphs offer some answers to the key questions facing the business officer or tax manager involving the school’s tax obligations.

When Are Tax Deposits and Tax Forms Due?

Many different tax forms exist, and often they are due at different times of the year, month and quarter. Due dates and deposit dates should be on the tax calendar. The business officer or tax manager should review the tax calendar at least quarterly at tax committee meetings.

Who Prepares the Tax Forms?

The business officer or dedicated tax manager must determine who prepares the forms and in what departmentwhere these employees work. Their other duties should not conflict with their responsibility to meet deposit due dates. They also should have adequate training and be aware of any changes in tax law that might affect reporting of the school’s tax obligations.

How Does the Business Officer Know the Forms Are Completed?

Effective controls and monitoring processes will help the business officer ensure that all tax deposits and filings are done on a timely basis. As noted earlier, it’s great to have written policies, but they need to be looked at more than once year. When something goes wrong, the business officer can use that event as an opportunity to correct or update the policy so the issue or error doesn't happen again.

STEP FIVE: MONITORING

So far, this chapter has outlined the first four steps toward tax compliance:

Being aware of the school’s tax obligations Identifying the various people, obligations and areas that are potential tax issues Creating procedures and policies that allow the school to meet all of its tax reporting

obligations in a timely manner Reporting tax obligations to the IRS and other taxing authorities more than once a year

and knowing who is assisting in the effort

The fifth step, monitoring, is another continual activity and an obligation of the business and finance departmentsoffice on behalf of the school. Monitoring involves reviewing and managing a control system. It begins at the top and filters downward throughout the various departmentsareas of the school. It is enterprise risk management with a tax focus.

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A detailed mission statement can provide a focus for monitoring tax compliance. The statement might list objectives for each functional area that supports the involved in tax departmentissues. It should prioritize the objectives in order of their importance to the strategic tax compliance program and assess risks that could prevent the school from accomplishing its objectives. One objective could spell out the degree to which policies and procedures are defined and documented. Others could outline the degree to which certain functions are outsourced.

Ongoing monitoring should be a part of regular supervisory activities. A periodic meeting should include monthly or quarterly reviews by management to test the effectiveness of the school’s policies and procedures. Those policies and procedures should also include two areas that schools sometimes overlook: how to report deficiencies, and what processes need to be reported and to whom, so corrective action can be taken. Further, the school’s policies and procedures should include a statement as to what risk is being controlled—in this case, the financial risk of non-compliance including reputational and financial damage.

The business officer or tax manager should ask employees who handle tax issues how risk activity is controlled, which tools they use to control risk and how they monitor risk through reports and systems.

Consistency and Ease of Use

The business officer or tax manager should be the contact listed in the school’s written policies and procedures for tax questions. This document should start out with a statement about the need for tax compliance guidelines. Another section should outline the tax responsibilities of various departments functions such as accounts payable or payroll. The document should also include a glossary of uncommon terms, a list of required forms and where to locate them, and an agreement for response or turnaround time. The guide should also feature a “frequently asked questions” section that pertains to the most common tax situations encountered at the departmental level. It is also helpful to provide completed examples of all forms the school must submit. If forms are available online, the guide can provide links to that information.

Staying up to Date

Streamlining policies and procedures requires collaboration among various departments functions at a school. The endeavor can be slow-paced; therefore it’s wise at the outset to bring to the table everyone who might be impacted by policies. Include areas such as legal, human resources, payroll, internal auditing, risk management, property control/asset management, purchasing and accounts payable.

The internal auditing group, included in the group above, can serve as an effective means of monitoring compliance during tax discussions. One easy question that an internal audit can ask of departments different functions is, “Do you sell anything?” With the answer to that one question, the business officer can determine if the school has any liability for sales tax or UBIT.

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Monitoring compliance is another ongoing activity in a tax compliance program. It involves:

Having policies in place that address the tax aspects of activities at a school Setting up requirements to review policies annually as tax laws change Assigning responsibility for ownership of tax policies Including internal audits as an ally in monitoring tax compliance Hiring a tax manager or centralizing tax responsibilities to the extent possible

With these five steps in place, the business officer can feel that he or she has taken the steps necessary to propel the school toward Tax Nirvana.

STEP SIX: TAX NIRVANA

Following the five steps above will take a school to the state of being fully compliant with all tax laws. Tax Nirvana occurs when everyone at a school is involved in tax compliance, aware of and able to identify potential tax issues, and able to comply with requirements for reporting, deposits and filings. Through constant monitoring and complete reporting to all tax authorities, the school will remain in this state and be able to defend itself against challenges.

CONCLUSION

Tax-savvy independent school business officers can build a strong foundation for tax compliance by knowing about the different types of taxes, raising their own as well as their colleagues’ awareness of tax issues and identifying areas on campus where tax issues may exist. While it may seem overwhelming to comprehend an entire school’s tax liability, having a solid tax team as a partner is an invaluable tool toward becoming and staying compliant.

Compliance means constant training on changing tax laws for everyone involved. Independent school business officers don’t need to be tax experts, but they do need to be conversant in major areas and to put controls in place that easily identify lapses in tax compliance.

Contributing AuthorSteve Hoffman TheTaxTranslator.com

As “The Tax Translator,” Steve helps colleges and universities and other nonprofits set policies and procedures regarding tax issues. He worked for the IRS for 15 years and was a tax manager for three universities for 12 years. By translating tax talk into plain English, nonprofit organizations can understand how tax issues affect them, gain protection against IRS action and maintain their nonprofit status. In addition to providing tax advice and guidance, Steve helps organizations resolve tax issues and represents them in audits. He holds the designation of Enrolled Agent before the IRS (EA), which allows him to represent nonprofits in tax matters.

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Steve is a frequent presenter on tax compliance and other tax-related issues and the author of many articles and two books, Resources from The Tax Translator and Taxation for Colleges and Universities: Six Steps to a Successful Tax Compliance Program.

RESOURCES

Hoffman, Steve. Resources from The Tax Translator.

----. Taxation for Universities and Colleges: Six Steps to a Successful Tax Compliance Program.

IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. http://www.irs.gov/pub/irs-pdf/fss8.pdf

Another Resource is my web page: TheTaxTranslator.com and then directed to the tab called, “Tax Stuff for You”

TAX TOOLKIT ON NBOA.ORG tk

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