Higher Education: IRS And Education Could Better Address Risks Associated with For-Profit College Conversions

What GAO Found

In its December 2020 report, GAO identified 59 for-profit college conversions that occurred from January 2011 through August 2020. A for-profit college may convert to nonprofit status for different reasons. In about one-third of the conversions, GAO found that former owners or other officials were insiders to the conversion—for example, by creating the tax-exempt organization that purchased the college or retaining the presidency of the college after its sale (see figure). While leadership continuity can benefit a college, insider involvement in a conversion poses a risk that insiders may improperly benefit—for example, by influencing the tax-exempt purchaser to pay more for the college than it is worth. Once a conversion has ended a college’s for-profit ownership and transferred ownership to an organization the Internal Revenue Service (IRS) recognizes as tax-exempt, the college must seek Department of Education approval to participate in federal student aid programs as a nonprofit college. GAO also found in its December 2020 report that Education had approved 35 colleges as nonprofit colleges since January 2011 and denied two; nine were under review and 13 closed prior to Education reaching a decision.

Figure: Example of a For-Profit College Conversion with Officials in Insider Roles

IRS guidance directs staff to closely scrutinize whether significant transactions with insiders reported by an applicant for tax-exempt status will exceed fair-market value and improperly benefit insiders. If an application contains insufficient information to make that assessment, guidance says that staff may need to request additional information. In its December 2020 report, GAO found that for two of 11 planned or final conversions involving insiders that were disclosed in an application, IRS approved the application without certain information, such as the college’s planned purchase price or an appraisal report estimating the college’s value. Without such information, IRS staff could not assess whether the price was inflated to improperly benefit insiders, which would be grounds to deny the application. If IRS staff do not consistently apply guidance, they may miss indications of improper benefit.

Education has strengthened its reviews of for-profit college applications for nonprofit status, but it does not monitor newly converted colleges to assess ongoing risk of improper benefit. In two of three cases GAO reviewed in depth for its December 2020 report, college financial statements disclosed transactions with insiders that could indicate the risk of improper benefit. Education officials agreed that they could develop procedures to assess this risk through its audited financial statement reviews. Until Education develops and implements such procedures for new conversions, potential improper benefit may go undetected.

Why GAO Did This Study

A for-profit college may convert to nonprofit status for a variety of reasons, such as wanting to align its status and mission. However, in some cases, former owners or other insiders could improperly benefit from the conversion, which is impermissible under the Internal Revenue Code and Higher Education Act of 1965, as amended.

This statement—based on GAO’s December 2020 report (GAO-21-89)—discusses what is known about insider involvement in conversions and the extent to which IRS and Education identify and respond to the risk of improper benefit. We also requested updates from IRS and Education officials on any agency actions taken to implement the December 2020 report recommendations.

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    The agency’s Jet [Read More…]
  • Secretary Blinken’s Call with Azerbaijani President Aliyev
    In Crime Control and Security News
    Office of the [Read More…]
  • District Court Orders Washington State Company and its Owner to Stop Distributing Adulterated Juice Products
    In Crime News
    A federal court permanently enjoined a Sunnyside, Washington, company from preparing, processing, and distributing adulterated juice and other food products, the Department of Justice announced today.
    [Read More…]
  • Secretary Michael R. Pompeo’s Call with Indian External Affairs Minister S. Jaishankar
    In Crime Control and Security News
    Office of the [Read More…]
  • New Caledonia Travel Advisory
    In Travel
    Exercise increased [Read More…]
  • Ensuring a Transparent, Thorough Investigation of COVID-19’s Origin
    In Crime Control and Security News
    Michael R. Pompeo, [Read More…]
  • Judicial and Legislative Branches to Continue Discussions on Judiciary Case Management Bill
    In U.S Courts
    The Judicial Conference of the United States expressed its opposition to the version of a bill passed by the House this week, saying it “will have devastating budgetary and operational impact on the Judiciary and our ability to serve the public” by imposing radical and costly changes on the Third Branch’s electronic case management system without adequate funding.
    [Read More…]
  • Chinese National Sentenced for Laundering Millions for Mexican Drug Cartels
    In Crime News
    A Chinese national was sentenced today to five years in prison and ordered to forfeit more than $4.2 million for laundering drug proceeds generated by large-scale cocaine trafficking in the United States.
    [Read More…]
  • United States Obtains Final Judgment and Permanent Injunction Against Edward Snowden
    In Crime News
    On Sept. 29, 2020, the [Read More…]