Cost Allocation Methodology
Auditors will operate under the theory that the burden of proof rests on the institution when claiming that expenses are "primary and proximate" to the production of unrelated income. The auditors may require documentary verification of expense allocation bases that were not questioned in prior IRS audits. The IRS will request "proof" of cost allocation relationships including (a) allocation of administrative salaries, (b) allocation of utility costs, and (c) allocation of general administrative overhead. The IRS will question any allocations that are based on percent of sales as they are looking for cost accounting allocations based on number of units, square footage, actual usage, etc.
Dual Use Facility Cost Allocation
The IRS is not following the precedent Rensselaer Polytechnic case. The IRS wants facility costs to be allocated based on a 24-hour day, 365-day year basis usage theory, rather than based on number of days a facility is actually used.