WASHINGTON - The Internal Revenue Service's proposed guidelines for auditing the tax-exempt financings of nonprofit colleges and universities are more likely to lead to fishing expeditions than to the discovery of abuse. accountants and lawyers told agency officials at a hearing yesterday.

The guidelines, which the IRS proposed for its agents late last year, would touch on all of the tax issues that could be raised in an audit of a college or university, including issues related to tax-exempt bonds.

Under the guidelines, colleges or universities that borrow on a tax-exempt basis would have to provide IRS agents with detailed information and reams of documents about those tax-exempt financings.

But several accountants and lawyers, some of them representing universities, told IRS officials at a hearing yesterday that the guidelines as they pertain to tax-exempt bonds are "unfocused" and "excessive."

"We believe that the guidelines will result in agents spending a great deal of time examining plainvanilla bond issues which have already been extensively reviewed by bond counsel and which present no tax issues." said Philip G. Royalty, a partner at Ernst & Young and chairman of the American Institute for Certified Public Accountants' tax-exempt organizations committee.

"Instead of requiring agents to engage in a fishing expedition, the guidelines should be sharpened to focus on specific problem areas that the IRS has already determined require close review," Royalty said.

At the end of the hearing, an IRS official promised that the guidelines would be reworked to take into account some of the concerns that were raised, but he was not specific about what revisions would be made.

"We will be going back to the drawing board to try to rework these guidelines to bring them more in line with some of the comments you have given us." said Jay Rotz, an executive assistant in the IRS' exempt organizations technical division.

Royalty told IRS officials at the hearing that his group is concerned about the guidelines' "excessive scrutiny" of issues related to tax-exempt bonds, including whether a university has demonstrated a need for a bond-financed project.

"We question whether this is really something the IRS needs to be concerned with," Royalty said, noting that state and local issuers usually determine a project is needed before financing it with bonds.

Royalty also complained that, "The guidelines require IRS agents to make voluminous document requests and to review these documents."

For bond issues, the guidelines call for agents to obtain all bond documents as well as feasibility studies, developer and management agreements, deeds, trusts, and documents such as those dealing with credit enhancement.

Laverne L. Knodle, the comptroller of Purdue University, who was representing the National Association of College and University Business Officers, agreed that the level and volume of documentation called for by the guidelines is in some cases "needlessly excessive in scope."

Knodle said the IRS guidelines initially should limit agents to requesting the official statements for bond issues. Additional documents should be requested only if the reviews of the official statements raise concerns and suggest that further investigation is needed, he said.

Milton Cerny, a lawyer with Caplin & Drysdale in Washington, who was speaking for an American Bar Association committee, agreed that the IRS needs to restrict the scope of tax-exempt bond information that must be provided to its auditors.

Cerny recommended that the IRS develop a "risk assessment profile" that could be used to focus on potential audit concerns related to bond issues. The IRS has already developed such a profile for organizations that are seeking tax-exempt status and that plan to finance some of their activities with bonds, he said.

"The profile could be developed and then, from that checklist, the agent could determine whether all of these bond documents are needed," Cerny said.

Cerny also objected to the guidelines' requirement that agents determine whether a university's board of trustees has met a "prudent-man" fiduciary standard in incurring short-term and long-term debt. The "prudent-man" rule, which addresses the appropriateness of a transaction, is a state standard that would be difficult to apply for federal tax purposes, Cerny said.

Instead of trying to apply a state fiduciary standard to borrowings, the IRS guidelines should clearly describe the kinds of abuses that could occur, Cerny said.

Albert G. Horvath, an assistant vice president for finance at Carnegie Mellon University in Pittsburgh, urged the IRS to coordinate its audit program with other federal, state, local, and private audit activities.

Horvath ticked off a list of more than a dozen groups that audit his university, complaining about the enormous costs of such activities in terms of time, manpower, and money.

"Many times we are inundated with auditors and reviewers. These place a real strain on all of the university's resources," he said.

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