H.R. 10330: Higher Education Oversight for Nonprofits Ensuring Standards and Transparency Act

This bill would add new rules for the IRS when it investigates or audits colleges and universities, including their related organizations. In plain terms, it would make it harder for the IRS to start and carry out tax inquiries and examinations involving universities unless certain steps are followed first.

What the bill covers

The bill defines “university” broadly to include:

• institutions of higher education, and
• related organizations connected to those institutions.

It applies only to tax inquiries and examinations about whether a university:

• has income that is exempt from tax under certain rules,
• is exempt from income tax as a nonprofit, or
• is engaged in unrelated business activities that could be taxable.

Rules for starting an IRS inquiry

The IRS could begin a university tax inquiry only if a high-level Treasury official reasonably believes, based on written facts, that there may be a tax issue. Before starting, the IRS would also have to give the university written notice explaining:

• the concerns that led to the inquiry,
• the general subject matter, and
• the legal and procedural rights involved, including the right to a conference before records are examined.

Rules for starting an IRS examination

The IRS could begin a more formal examination only after the inquiry begins and after additional notice requirements are met. At least 15 days before the examination starts, the IRS would have to send written notice to the university and IRS counsel. That notice would have to include:

• a copy of the earlier inquiry notice,
• a description of the records and activities the IRS wants to examine,
• an offer to hold a conference to try to resolve the issues, and
• copies of certain IRS documents that must be disclosed under the Freedom of Information Act.

The university would have the chance to request a conference before the examination begins.

Limits on what and how long the IRS can examine

The bill says IRS examinations of university business records and activities must be limited to what is necessary to decide the tax issue. It also sets deadlines:

• an inquiry or examination generally must be completed within 2 years of the examination notice date,
• if there is an inquiry but no examination, it must be finished within 90 days, and
• these time periods can be paused in certain situations, such as court proceedings or delays caused by the university’s failure to provide requested information.

Limits on IRS decisions and retroactive tax assessments

Before the IRS can decide that a university’s income is taxable, revoke its tax-exempt status, issue a deficiency notice, or assess an underpayment, IRS Division Counsel would have to confirm in writing that the IRS substantially complied with the new rules and approve the action.

The bill also limits how far back the IRS can go when it makes certain tax changes:

• generally, only the 3 most recent taxable years could be assessed for issues involving tax-exempt income or nonprofit status,
• in some cases, that period would expand to 6 years, and
• for unrelated business income tax, the lookback period would generally be 6 years.

Penalties for not following the rules

If the IRS does not substantially follow the new notice, conference, or approval requirements, a court proceeding to enforce a summons related to the inquiry or examination would be put on hold until the problem is corrected. The bill says this would be the main legal remedy for such noncompliance.

Limits on repeated audits

If an inquiry or examination ends without resulting in a tax change, revocation, deficiency notice, assessment, or a request for significant operational changes, the IRS generally could not start another university tax inquiry or examination on the same or similar issues for 5 years unless the Secretary approves it in writing.

Reporting to Congress

Within 60 days after starting a university tax inquiry or examination, the Treasury Secretary would have to send a confidential report to the House Ways and Means Committee and Senate Finance Committee. The report would include the university’s identity, a statement that the legal requirements were met, a copy of the notice sent to the university, and related regulations.

What it would not cover

The bill would not apply to criminal investigations, tax matters involving people or entities other than universities, certain emergency assessments, willful attempts to evade tax, or knowing failures to file a return.

Effective date

The new rules would apply to university tax inquiries and examinations that begin after the bill becomes law.

Relevant Companies

None found