The Education Department and the Internal Revenue Service do not sufficiently examine conversions of for-profit colleges to nonprofits, a General Accounting Office report found Wednesday.
The exemptions without proper review could lead to improprieties, when officials or owners of a for-profit are involved in the new tax-exempt entity. The nonprofit, for example, could purchase the for-profit at higher than market rates.
The IRS is first supposed to examine the transactions. But in two of 11 cases examined by the GAO, the IRS approved the tax-exempt status of the new organization without having such basic information as the purchase price or the assessed value of the for-profit college.
The Education Department is supposed to examine conversions approved by the IRS and strengthened its reviews in 2016, the report said. However, the department acknowledged to the GAO it does not follow up and examine for improper benefits for the former owners of a college once the conversion is approved. The GAO said it examined financial records of recently converted colleges and found some red flags missed by the department.
“For example, one college advanced funds to another business controlled by its former owner and later purchased assets from that business, all while the former owner continued to lead the college as its president. Although transactions between a nonprofit college and related parties (such as companies controlled by the college’s president and former owner) are not prohibited, they can indicate a risk that a college’s resources may have been improperly used for the former owner’s benefit,” the report said.
“Today’s GAO report confirms the need for stronger federal oversight to protect students and taxpayers from the abuse of for-profit to nonprofit conversions,” said Representative Bobby Scott, the Democratic chairman of the House education committee. Scott, of Virginia, had requested the GAO investigation with Democratic senators Maggie Hassan, of New Hampshire, Patty Murray, of Washington, and Dick Durbin, of Illinois.