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GAO Calls for ED, IRS to Provide Better Oversight of For-Profit Tax Filing Conversions

By Hugh T. Ferguson, NASFAA Staff Reporter

In response to a request from congressional Democrats, the Government Accountability Office (GAO) has issued a report on for-profit college conversions, highlighting potential conflicts of interest in the conversion process and calling for stronger oversight.

For-profit college conversions — the process used when for-profit colleges become a nonprofit entity, changing both their tax filing status and level of higher education accountability requirements applied to the institution — has come under scrutiny by Democrats, especially during the tenure of former education secretary, Betsy DeVos. 

The inquiry, released on Wednesday, identified 59 for-profit college conversions that occurred between January 2011 and August 2020. GAO found that during that time, Internal Revenue Service (IRS) staff didn't always follow guidance to assess the risks of improper benefit and the Department of Education (ED) has not assessed ongoing risks in its reviews.

“In about a third of cases we identified, college owners or officials held leadership roles in the college's tax-exempt buyer,” the report stated. “If that is the case, they aren't allowed to use their influence to inflate the college's sale price or otherwise improperly benefit from the conversion.”

While a for-profit may convert to nonprofit status to better align its status and mission, the conversion is impermissible should it allow former owners or other insiders to improperly benefit from the conversion, as outlined in the Higher Education Act (HEA).

GAO recommended that the IRS strengthen its process for reviewing for-profit conversion applications and that ED provide better oversight after a conversion occurs.

Rep. Bobby Scott (D-Va.), chairman of the House Education and Labor committee, and Sen. Patty Murray (D-Wash.) incoming chair of the Senate Health, Education, Labor, and Pensions (HELP) committee, had both requested the report and pledged that their committees would crack down on predatory institutions.

“Predatory, for-profit colleges should not be able to evade accountability by simply converting to a non-profit school,” Scott said. “Today’s GAO report confirms the need for stronger federal oversight to protect students and taxpayers from the abuse of for-profit to non-profit conversions.”

Murray is slated to assume leadership of the Senate panel in the coming days, now that Senate leaders have come to a power-sharing agreement with a 50-50 split in party control.

“This report makes clear that for too many for-profit colleges, making the transition to non-profit status isn’t about what’s in the best interest of students — it’s about lining the pockets of wealthy executives,” Murray said. “We’ve got a lot more work to do to ensure that colleges are held accountable and to protect students from fraud and abuse — so I absolutely encourage the Department of Education and the IRS to swiftly act on the GAO’s recommendations.”

President Joe Biden’s administration has also indicated that it would provide more oversight into for-profit institutions. Vice President Kamala Harris has spoken extensively of her experience as the attorney general of California, where she sued for-profit chain Corinthian Colleges, accusing it of false and predatory advertising and intentionally making misrepresentations to students, among other things.

“These findings should spark action,” said Robert Shireman, director of higher education excellence and senior fellow at The Century Foundation, in a press release. “We need greater oversight to ensure that de-facto for-profit schools and their owners don’t get away with misleading students and dodging regulations.”

 

Publication Date: 1/28/2021


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