Higher Education: IRS And Education Could Better Address Risks Associated with For-Profit College Conversions – GAO
Fast Facts
A for-profit college can be converted into a nonprofit college if it’s sold to a tax-exempt organization and the Education Department approves the conversion.
We testified that in about a third of cases we identified, college owners or officials held leadership roles in the college’s tax-exempt buyer. 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.
But IRS staff didn’t always follow guidance to assess improper benefit risks. Also, Education doesn’t assess ongoing risks in its reviews. We recommended improvements in agency review processes.
Highlights
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.