Senate Democrats are calling on the IRS and Department of Education to crack down on for-profit colleges becoming nonprofits to evade taxes and regulation. (Photo by Bill O’Leary/The Washington Post)

Lawmakers are calling on the Department of Education and the Internal Revenue Service to crack down on for-profit colleges that are converting to nonprofits to evade federal income taxes and regulations.

On Friday, a group of Senate Democrats, including Sens. Elizabeth Warren (Mass.) and Richard Blumenthal (Conn.), sent a letter to Education Secretary Arne Duncan and IRS Commissioner John Koskinen demanding they “prevent former for-profit education companies from abusing their tax-exempt status and to protect students from predatory actors.”

“These sham non-profits make a mockery of traditional non-profit governing and accountability structures. Their incestuous leadership arrangements and troubling debt structures enable them to continue posting hefty profits while providing questionable results for students,” the senators wrote.

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Officials from the IRS, which grants nonprofit status, did not immediately respond to requests for comment.

Education spokeswoman Denise Horn said the department has not given the schools the needed approval to avoid being subject to rules that govern for-profit colleges. She said the agency is concerned that some owners may “adopt the trappings of nonprofit status” to side-step regulation while “continuing to make money from the schools.”

“We share the Senators’ commitment to helping students and also look forward to working with Congress to strengthen both consumer protections for students and our oversight and enforcement tools for institutions participating in the federal student aid program,” Horn said.

Friday’s letter comes two weeks after a report from the Century Foundation questioning whether some of the newly minted nonprofit schools are still reaping the financial benefits of operating as for-profit institutions.

“This is a problem that has fallen through the cracks. I am hopeful that the senators’ recognition of the urgency will elevate the issue at the IRS and at the Department of Education,” said Robert Shireman, author of the report and a senior fellow at the Century Foundation.

Shireman examined records and communications between the IRS and four schools that recently shed their for-profit status. He found conflicts of interest with owners of former for-profits still being paid millions of dollars and remaining heavily involved in the governance of the new nonprofits. The findings run counter to what it means to become a nonprofit school, relinquishing ownership and placing control in the hands of trustees who operate in the interest of the public good with no financial benefit, the report said.

In the example of Everglades College, Arthur Keiser lent the nonprofit school $321 million to purchase and convert his eponymous for-profit university in Florida. Everglades, where Keiser serves as president, paid more than $34 million to entities owned by Keiser’s family. Officials at Everglades did not immediately respond to requests for comment.

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Accusations of owner impropriety also came up in the case of the Center for Excellence, which purchased Stevens-Henager College and College America in Utah from Carl Barney for $636 million in 2012. Barney became the only member of the center’s corporate entity and chairman of the board of trustees, where all but two members are compensated. Paying board members is unusual for nonprofits that are governed by unpaid trustees to make sure decisions are not influenced by personal financial interests.

When the report came out, Eric Juhlin, chief executive of the Center for Excellence, argued that those board members are reimbursed $12,000 as a token of appreciation for the amount of time and effort they dedicate. He insisted the conversion had nothing to do with trying to avoid regulation and called the report “biased and intentionally misleading.”

There are benefits to operating as a nonprofit institution. Beside the millions saved in taxes, nonprofit schools are not subject to the so-called 90/10 rule, which prohibits for-profit colleges from getting more than 90 percent of their operating revenue from federal student aid funding.

When Remington College ran into trouble with the 90 percent threshold, the Florida school was acquired by Education America, a nonprofit organization, with a loan provided by Remington. The board of trustees not only includes the chief executive of Remington and Educate America, but also employees of a firm that assisted with the acquisition. The IRS approved the conversion at Remington, which did not respond to requests for comment, in eight weeks despite the conflicts of the board, the report said.

Shireman criticized the IRS and the Education Department for failing to take action against the four schools and called on both agencies to do a better job of auditing institutions that claim to be nonprofits.

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