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Harvard University Audited as Part of IRS Probe of Nonprofits

Harvard University Audited as Part of IRS Probe of Nonprofits

By Michael McDonald and John Lauerman, Bloomberg News

January 21, 2010

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, Massachusetts-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 federal agency’s Web site. 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 Web site. Bruce Friedland, 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. John Longbrake, a Harvard spokesman, declined to comment.

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 at the school’s endowment, known as Harvard Management Co., in 2003 after the top six in- house managers earned a combined $107.5 million the prior year. Jack Meyer, who ran the endowment for 15 years, left in 2005. Jane Mendillo took over Harvard Management in 2008.

Senator Charles Grassley, an Iowa Republican, has been examining finances at universities, including how much funding rich schools give to student financial aid, and drug company payments to university researchers. Grassley called the IRS probe “long overdue” when it began in 2008.

To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net; John Lauerman in Boston at jlauerman@bloomberg.net.

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