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?

Education Code Section ◦ 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 ◦ 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 ◦ 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 vs. Auxiliary FoundationAuxiliary 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

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.

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: 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 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 !!