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

What GAO Found

GAO identified 59 for-profit college conversions that occurred from January 2011 through August 2020, almost all of which involved the college’s sale to a tax-exempt organization. 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 (Education) approval to participate in federal student aid programs as a nonprofit college. Since January 2011, Education has approved 35 colleges as nonprofit colleges and denied two; nine are 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 two of 11 planned or final conversions involving insiders that were disclosed in an application, GAO found that 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, college financial statements disclosed transactions with insiders that could indicate the risk of improper benefit. Education officials agreed that they could assess this risk through its audited financial statement review process and could develop procedures to do so. 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.

GAO was asked to examine for-profit college conversions. This report reviews what is known about insider involvement in conversions and to what extent IRS and Education identify and respond to the risk of improper benefit. GAO identified converted for-profit colleges and reviewed their public IRS filings. GAO also examined IRS and Education processes for overseeing conversions, interviewed agency officials, and reviewed federal laws, regulations and agency guidance. GAO selected five case study colleges based on certain risk factors, obtained information from college officials, and reviewed their audited financial statements. In three cases, GAO also reviewed Education case files. Because of the focus on IRS and Education oversight, GAO did not audit any college in this review to determine whether its conversion improperly benefitted insiders.

What GAO Recommends

GAO is making three recommendations, including that IRS assess and improve conversion application reviews and that Education develop and implement procedures to monitor newly converted colleges. IRS said it will assess its review process and will evaluate GAO’s other recommendation, as discussed in the report. Education agreed with GAO’s recommendation.

For more information, contact Melissa Emrey-Arras at (617) 788-0534 or emreyarrasm@gao.gov.

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    The Telework Enhancement Act of 2010 (the act) defines telework as a work flexibility arrangement under which an employee performs the duties and responsibilities of their position and other authorized activities from an approved worksite other than the location from which the employee would otherwise work. GAO previously identified key practices in telework-related literature and guidelines that federal agencies should implement in ensuring successful telework programs. These key practices may be grouped under seven categories. Program planning. Consistent with a key practice GAO identified, agencies are required to have a telework managing officer. Other key practices related to planning for a telework program include establishing measurable telework program goals, and providing funding to meet the needs of the telework program. Telework policies. Agencies can help ensure their workforces are telework ready by establishing telework policies and guidance. To ensure that teleworkers are approved on an equitable basis, agencies should establish eligibility criteria, such as suitability of tasks and employee performance. Agencies should also have telework agreements for use between teleworkers and their managers. Performance management. Agencies should ensure that the same performance standards are used to evaluate both teleworkers and nonteleworkers. Agencies should also establish guidelines to minimize adverse impacts that telework can have on nonteleworkers. Managerial support. For telework programs to be successful agencies need support from top management. They also need to address managerial resistance to telework. Training and publicizing. Telework training helps agencies ensure a common understanding of the program. The act requires agencies to provide telework training to employees eligible to telework and to managers of teleworkers. Keeping the workforce informed about the program also helps. Technology. Agencies need to make sure teleworkers have the right technology to successfully perform their duties. To that end, agencies should assess teleworker and organization technology needs, provide technical support to teleworkers, and address access and security issues. Program evaluation. Agencies should develop program evaluation tools and use such tools from the very inception of the program to identify problems or issues. Agencies can then use this information to make any needed adjustments to their programs. GAO has previously reported instances where selected agencies faced challenges implementing telework programs that aligned with key practices. For example, three of four selected agencies did not require review or document their review of ongoing telework agreements. These reviews are important to provide assurance that the agreements reflect and support their current business needs. GAO also previously reported that managers at three of four selected agencies were not required to complete telework training before approving staff's telework agreements. The training is important to ensure managers fully understood agency telework policy and goals before approving or denying requests to telework. Telework offers benefits to federal agencies as well as to the federal workforce. These include improving recruitment and retention of employees, reducing the need for costly office space, and an opportunity to better balance work and family demands. In addition, telework is a tool that agencies can use to help accomplish their missions during periods of disruption, including during the current COVID-19 pandemic. Congress has encouraged federal agencies to expand staff participation in telework, most recently by passing the Telework Enhancement Act of 2010 (the act). The act established requirements for executive agencies' telework policies and programs, among other things. This statement provides key practices to help ensure the success of telework programs. The statement is based on GAO's body of work on federal telework issued from July 2003 through February 2017. GAO has recently initiated two reviews related to federal telework. One is examining the extent to which agencies have used telework during the COVID-19 pandemic, including the successes and challenges agencies experienced. The second is reviewing agencies' telework information technology infrastructure. For more information, contact Michelle B. Rosenberg at (202) 512-6806 or rosenbergm@gao.gov.
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  • VA Health Care: Community Living Centers Were Commonly Cited for Infection Control Deficiencies Prior to the COVID-19 Pandemic
    In U.S GAO News
    The Department of Veterans Affairs (VA) is responsible for overseeing the quality of nursing home care provided to residents in VA-owned and -operated community living centers (CLC). VA models its oversight process on the methods used by the Centers for Medicare & Medicaid Services, which uses inspections of nursing homes to determine whether the home meets federal quality standards. These standards require, for example, that CLCs establish and maintain an infection prevention and control program. VA uses a contractor to conduct annual inspections of the CLCs, and these contractors cite CLCs with deficiencies if they are not in compliance with quality standards. Infection prevention and control deficiencies cited by the inspectors can include situations where CLC staff did not regularly use proper hand hygiene or failed to correctly use personal protective equipment. Many of these practices can be critical to preventing the spread of infectious diseases, including COVID-19. GAO analysis of VA data shows that infection prevention and control deficiencies were the most common type of deficiency cited in inspected CLCs, with 95 percent (128 of the 135 CLCs inspected) having an infection prevention and control deficiency cited in 1 or more years from fiscal year 2015 through 2019. GAO also found that over the time period of its review, a significant number of inspected CLCs—62 percent—had infection prevention and control deficiencies cited in consecutive fiscal years, which may indicate persistent problems. An additional 19 percent had such deficiencies cited in multiple, nonconsecutive years. Why GAO Did This Study COVID-19 is a new and highly contagious respiratory disease causing severe illness and death, particularly among the elderly. Because of this, the health and safety of the nation’s nursing home residents—including veterans receiving nursing home care in CLCs—has been a particular concern.  GAO was asked to review the quality of care at CLCs. In this report, GAO describes the prevalence of infection prevention and control deficiencies in CLCs prior to the COVID-19 pandemic. Future GAO reports will examine more broadly the quality of care at CLCs and VA’s response to COVID-19 in the nursing home settings for which VA provides or pays for care. For this report, GAO analyzed VA data on deficiencies cited in CLCs from fiscal years 2015 through 2019. Using these data, GAO determined the most common type of deficiency cited among CLCs, the number of CLCs that had infection prevention and control deficiencies cited, and the number of CLCs with repeated infection prevention and control deficiencies over the period from fiscal years 2015 through 2019. GAO also obtained and reviewed inspection reports and corrective action plans to describe examples of the infection prevention and control deficiencies cited at CLCs and the CLCs’ plans to remedy the noncompliance. For more information, contact Sharon M. Silas at (202) 512-7114 or SilasS@gao.gov.
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    A criminal complaint was unsealed today in federal court in the Eastern District of New York charging Baimadajie Angwang, 33, a New York City Police Department officer and United States Army reservist, with acting as an illegal agent of the People’s Republic of China (PRC) as well as committing wire fraud, making false statements and obstructing an official proceeding. Angwang was arrested earlier today in Williston Park, New York, and his initial appearance is scheduled for this afternoon before United States Magistrate Judge Peggy Kuo at the United States Courthouse in Brooklyn, New York.
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  • Economic Adjustment Assistance: Actions Needed to Better Address Workers’ Needs and Assess Program Effectiveness
    In U.S GAO News
    Workers who are eligible for federal economic adjustment assistance (EAA) programs may face challenges using them. There are four EAA programs and one tax credit that focus on assistance to individual workers displaced by policy and economic changes. These include programs administered by the Appalachian Regional Commission (ARC) and Department of Labor (DOL), which deliver services such as job training and counseling through state and local grantees. Selected grantees in all three states GAO visited described common challenges faced by workers from enrollment in EAA programs through re-entry into the job market. Grantees Described Common Challenges Workers Face in Accessing and Using Economic Adjustment Assistance (EAA) Program Services Interviews with selected grantees and GAO's data analysis revealed two key challenges with administering EAA programs and serving workers: Delays in grant decisions. From fiscal years 2015 through 2018, DOL took longer than legally required to process between 9 percent (3 out of 35) and 20 percent (3 out of 15) of National Dislocated Worker Grant applications. Grantees may serve fewer workers and may interrupt services to workers while awaiting decisions. DOL does not collect information on reasons for these delays and is missing opportunities to help ensure that dislocated workers receive timely assistance. Lack of information sharing. ARC and DOL do not share information about their EAA grant programs with grantees or each other, including information about grant projects that serve similar populations in similar geographic areas. As a result, ARC and DOL may fail to maximize program impact and reach across the 13-state Appalachian region. Regional officials said that coordination would enable them to better identify specific services needed by dislocated workers and which program might best be equipped to provide them. DOL has established performance measures to track outcomes for its EAA programs, but has experienced challenges with assessing the impact of job training offered under these programs. GAO reviewed two relevant studies on the impact of DOL's EAA programs containing some evidence that intensive services, such as one-on-one consultations and case management, were effective in improving earnings outcomes for dislocated workers. However, the studies were unable to effectively assess the impact of job training offered to dislocated workers under the programs due to methodological challenges. By collecting more quality evidence, DOL could be better able to determine if its EAA programs are helping workers achieve their employment goals. Federal EAA programs help workers adjust to various economic disruptions, such as policy changes on trade, defense, or energy, and shifts in immigration, globalization, or automation that cause a prolonged cyclical downturn and can dislocate workers. GAO was asked to review these programs. This report examines (1) what challenges eligible workers face in using EAA programs, (2) what challenges grantees face in implementing EAA programs and serving workers, and (3) what is known about the outcomes and impacts of selected EAA programs. GAO analyzed DOL grant processing data from fiscal years 2015 through 2018, the most recent data available at the time of GAO's analysis; reviewed outcome data from program year 2018 and program impact evaluations; interviewed ARC, DOL, and Department of the Treasury officials, as well as state and local officials in three states that experienced different economic disruptions and use different EAA programs; and reviewed relevant federal laws, regulations, and guidance. GAO is making seven recommendations, including that DOL address grant processing delays, DOL and ARC share information, and DOL prioritize improving the quality of evidence on the impact of job training for dislocated workers. DOL and ARC agreed with GAO's recommendations. For more information, contact Cindy S. Brown Barnes at (202) 512-7215 or brownbarnesc@gao.gov.
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    San Diego Christian College (SDCC), based in Santee, California, will pay $225,000 to resolve allegations under the False Claims Act for submitting false claims to the U.S. Department of Education in violation of the federal ban on incentive-based compensation, the Justice Department announced today.
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    Hamada Suisan Co. Ltd., the owner of the Japanese-flagged fishing vessel, M.V. Kyoshin Maru No. 20, pleaded guilty, pursuant to a plea agreement, to aiding and abetting the attempted export of shark fins out of Hawaii in violation of the Lacey Act, the Department of Justice announced.
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  • Dietary Supplement Executive Sentenced in Scheme to Fraudulently Sell Popular Dietary Supplements
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  • Science & Tech Spotlight: Vaccine Safety
    In U.S GAO News
    Why this Matters Safe vaccines are critical to fighting diseases, from polio to COVID-19. Research shows that the protection provided by U.S. licensed vaccines outweighs their potential risks. However, misinformation and unjustified safety concerns can cause people to delay or refuse vaccination, which may increase preventable deaths and prolong negative social and economic impacts. The Science What is it? A vaccine is generally considered safe when the benefits of protecting an individual from disease outweigh the risks from potential side effects (fig. 1). The most common side effects stem from the body's immune reaction and include swelling at the injection site, fever, and aches. Figure 1. Symptoms of polio and side effects of the polio vaccine. A vaccine is generally considered safe if its benefits (preventing disease) outweigh its risks (side effects). In rare cases, some vaccines may cause more severe side effects. For example, the vaccine for rotavirus—a childhood illness that can cause severe diarrhea, dehydration, and even death—can cause intestinal blockage in one in 100,000 recipients. However, the vaccine is still administered because this very rare side effect is outweighed by the vaccine's benefits: it saves lives and prevents an estimated 40,000 to 50,000 childhood hospitalizations in the U.S. each year. The two messenger RNA (mRNA) vaccines authorized for COVID-19—a disease that contributed to more than 415,000 American deaths between January 2020 and January 2021—can cause severe allergic reactions. However, early safety reporting found that these reactions have been extremely rare, with only about five cases per 1 million recipients, according to data from January 2021 reports by the Centers for Disease Control and Prevention. In general, side effects from vaccines are less acceptable to the public than side effects from treatments given to people who already have a disease. What is known? Vaccine developers assess safety from early research, through laboratory and animal testing, and even after the vaccine is in use (fig. 2). Researchers may rely on previous studies to inform future vaccine trials. For example, safety information from preclinical trials of mRNA flu vaccine candidates in 2017 allowed for the acceleration of mRNA COVID-19 vaccine development. Vaccine candidates shown to be safe in these preclinical trials can proceed to clinical trials in humans. In the U.S., clinical trials generally proceed through three phases of testing involving increasing numbers of volunteers: dozens in phase 1 to thousands in phase 3. Although data may be collected over years, most common side effects are identified in the first 2 months after vaccination in clinical trials. After reviewing safety and other data from vaccine studies, the Food and Drug Administration (FDA) may license a vaccine to be marketed in the U.S. There are also programs to expedite—but not bypass—development and review processes, such as a priority review designation, which shortens FDA’s goal review time from 10 to 6 months. Safety monitoring continues after licensing. For example, health officials are required to report certain adverse events—such as heart problems—following vaccination, in order to help identify potential long-term or rare side effects that were not seen in clinical trials and may or may not be associated with the vaccine. Figure 2. Vaccine safety is assessed at every stage: development through post-licensure. Following a declared emergency, FDA can also issue emergency use authorizations (EUA) to allow temporary use of unlicensed vaccines if there is evidence that known and potential benefits of the vaccine outweigh known and potential risks, among other criteria. As of January 2021, two COVID-19 vaccines had received EUAs, after their efficacy and short-term safety were assessed through large clinical trials. However, developers must continue safety monitoring and meet other requirements if they intend to apply for FDA licensure to continue distribution of these vaccines after the emergency period has ended. What are the knowledge gaps? One knowledge gap that can remain after clinical trials is whether side effects or other adverse events may occur in certain groups. For example, because clinical trials usually exclude certain populations, such as people who are pregnant or have existing medical conditions, data on potential adverse events related to specific populations may not be understood until vaccines are widely administered. In addition, it can be difficult to determine the safety of new vaccines if outbreaks end suddenly. For example, vaccine safety studies were hindered during the 2014-2015 Ebola epidemic when a large increase in the number of cases was followed by a sharp decrease. This disrupted the clinical trials of Ebola vaccine candidates, because the trials require many infected and non-infected people. Furthermore, a lack of understanding and/or misinformation about the steps taken to ensure the safety of vaccines hinders accurate public knowledge about safety concerns, which may cause people to delay or refuse vaccination. This resulting hesitancy may, in turn, increase deaths, social harm, and economic damage. Opportunities Continuing and, where necessary, improving existing vaccine safety practices offers the following opportunities to society: Herd immunity. Widespread immunity in a population, acquired in large part through safe and effective vaccines, can slow the spread of infection and protect those most vulnerable. Health care improvements. Vaccinations can reduce the burden on the health care system by reducing severe symptoms that require individuals to seek treatment. Eradication. Safe vaccination programs, such as those combatting smallpox, may eliminate diseases to the point where transmission no longer occurs. Challenges There are a number of challenges to ensuring safe vaccines: Public confidence. Vaccine hesitancy, in part due to misinformation or historic unethical human experimentation, decreases participation in clinical trials, impeding identification of side effects across individuals with different racial, ethnic, and socioeconomic backgrounds. Mutating viruses. Some viruses, such as those that cause the flu or COVID-19, may mutate rapidly and thus may require new or updated vaccines, for which ongoing safety monitoring is important. Long-term and rare effects. Exceedingly rare or long-term effects may not be identified until after vaccines have been widely administered. Further study is needed to detect any such effects and confirm they are truly associated with the vaccine. Policy Context & Questions What steps can policymakers take to improve public trust and understanding of the process of assessing vaccine safety? How can policymakers convey the social importance of vaccines to protect the general public and those who are most vulnerable? How can policymakers leverage available resources to support ongoing vaccine development and post-licensure safety monitoring? For more information, contact Karen Howard at (202) 512-6888 or HowardK@gao.gov.
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    A federal court in the Eastern District of North Carolina entered a consent judgment and injunction requiring a North Carolina pharmacy, Seashore Drugs Inc., its owner, John D. Waggett, and its pharmacist-in-charge, Billy W. King II, to pay $1,050,000.00 in civil penalties and to cease dispensing opioids or other controlled substances, the Department of Justice announced.
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  • Manhattan Man Sentenced to 15 Years in Prison for Attempting to Provide Material Support to Terrorist Organization
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    The Department of Justice announced today that Jesus Wilfredo Encarnacion, a/k/a “Jihadistsoldgier,” “Jihadinhear,” “Jihadinheart,” “Lionofthegood,” was sentenced to 15 years in prison for attempting to provide material support to Lashkar e-Tayyiba (LeT), a Pakistan-based designated foreign terrorist organization responsible for multiple high-profile attacks, including the infamous Mumbai attacks in November 2008.  In addition, Encarnacion was sentenced to a lifetime term of supervised release.  Encarnacion pleaded guilty on Jan. 22, 2020, before United States District Judge Ronnie Abrams, who also imposed today’s sentence.
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  • Federal Employees’ Compensation Act: Comparisons of Benefits in Retirement and Actions Needed to Help Injured Workers Choose Best Option
    In U.S GAO News
    Factors such as the timing of an injury in a career affect how Federal Employees' Compensation Act (FECA) total disability benefits compare to income security from typical federal retirement. The FECA program compensates federal employees for lost wages from work-related injuries, among other benefits. FECA recipients can receive this compensation for as long as their disability continues. At retirement age, they can remain on FECA or, instead, choose to receive their benefits from the Federal Employees Retirement System (FERS). Thus, FECA benefits represent a significant portion of retirement income for some injured federal employees. Through simulations, GAO found that factors such as the length of retirees' careers absent injury affected how similar their hypothetical FECA benefits packages were to their FERS packages in 2018. FERS benefits increase substantially the longer a federal employee works. As a result, median current and reduced FECA packages were greater than the FERS median for retirees with shorter careers absent injury. However, median FECA packages were similar to or less than FERS for retirees with longer careers (see figure). Median FECA Benefits as a Percentage of FERS Benefits by Career Length Absent an Injury For FECA recipients who choose to compare their FECA and FERS benefit options at retirement, estimates for most components of those benefits packages are available. However, the Department of Labor (DOL) does not routinely remind recipients to compare benefits, so they may be unaware of their options or how to consider them. In addition, DOL and the Social Security Administration (SSA) use a manual and highly complex process to calculate one key component of a FECA recipient's compensation in retirement related to Social Security benefits. As a result, estimates of FECA benefits in retirement that include this component are not readily available prior to retirement. These challenges hinder recipients' ability to accurately compare their options and may result in some recipients not choosing their best option at retirement. The President's budgets for fiscal years 2019-2021 have proposed several FECA reforms, including reducing disability compensation at retirement age. In a series of reports published in 2012, GAO analyzed the effects of similar proposed revisions to FECA compensation. GAO was asked to update its FECA and FERS benefit comparisons. This report examines (1) how FERS and total disability FECA benefits at retirement age compare under current and previously proposed reduced FECA compensation rates, and (2) the extent to which FECA recipients have access to information to compare their FECA and FERS benefits options. GAO compared the FERS benefits selected retirees received in 2018 with the hypothetical total disability FECA benefits they would have received from simulated injuries. GAO reviewed agency documents and interviewed officials from DOL, SSA, and other federal agencies. GAO is recommending that DOL remind FECA recipients as they approach retirement to obtain FERS benefit estimates for comparisons with FECA, and that DOL and SSA take steps to modernize and improve their process for calculating and providing information on certain FECA benefits in retirement that would enable recipients to make complete comparisons of retirement options. DOL and SSA concurred with all three recommendations. For more information, contact Cindy Brown Barnes at (202) 512-7215 or brownbarnesc@gao.gov.
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