IRS auditing Harvard in review of nonprofits

By Michael McDonald and John Lauerman
Bloomberg News / January 12, 2010

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Harvard University is one of 40 colleges that will be audited this year as part of the Internal Revenue Service’s review of the tax-exempt status of some nonprofit organizations, the school said in bond offering documents.

The audit “is just now beginning,’’ the Cambridge-based university said in documents detailing plans to sell $400 million of tax-exempt securities this week. The “examinations typically extend over more than a year and involve a team of agents reviewing a broad array of activities,’’ according to the documents.

In October 2008, the IRS sent questionnaires to 400 colleges and universities, asking how they manage taxable operations as well as how they “invest and use endowment funds,’’ according to a description of the so-called compliance project on the IRS’s website. The IRS is probing whether the institutions’ tax-exempt status should apply to income from activities not related to their educational mission.

The questionnaire also sought to “determine types and amounts of executive compensation,’’ according to the IRS website. An agency spokesman declined to comment.

Harvard received and responded to the IRS questionnaire and then learned it was one of 40 colleges and universities subject to a subsequent audit this year, the school said in its bond offering documents.

Harvard “has no reason to believe that the examination will have an adverse effect on the tax-exempt status of the university or any other aspect of the university’s operations,’’ the school said in the documents. A Harvard spokesman declined to comment further.

Harvard is the world’s richest college, with an endowment of $26 billion as of June 30, down from a peak of $36.9 billion in 2008.

An alumni group criticized pay for the endowment’s managers, known as Harvard Management Co., in 2003 after the top six in-house managers earned a combined $107.5 million the prior year.

Senator Charles Grassley, an Iowa Republican, has been examining finances at universities. He called the IRS probe “long overdue’’ when it began in 2008.