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
District
 May - or - May Not have direct
involvement with the District
 501(c)(3) Organization recognized by
the IRS and FTB
 Accounting guidance is contained in
the FASB.

Foundation
Auxiliary Organization
Typically formed to
provide financial support
to students, programs and
services of the district
 Fundraising Events
 May not be directly
accountable to the
District
 501 (c )(3) organization


Typically formed to
account for operations of
supporting activities of
the district
 Bookstores
 Should be directly
accountable to the
District
 501(c )(3) organization
Foundation vs. Auxiliary
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 deductable
 Accounting guidance is found in
Financial Accounting Standards Board
(FASB) pronouncements

 Full accrual accounting
Tax Compliance
Federal Form 990 Tax Returns are due
5 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 Compliance
Two Current Issues Being Evaluated:
1. Cross – State line donor solicitations

Each 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
IRS Colleges and Universities
Compliance Project
2.
◦
◦
◦
◦
◦
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-ExemptColleges-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 Steps

Review 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 Steps

Maintain 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 !!