[A] private middle and high school that receives nearly half a million dollars in taxpayer-funded tuition payments each year is in trouble with the IRS after failing to file the necessary paperwork three years in a row.
Rick Gordon, the founding director at the Compass School in Westminster, said in a phone interview late last week that the school hadn’t realized that they’d lost their tax-exempt status with the federal government until a reporter reached out.
The school is small, he said, and “resources are stretched really thin.” The part-time business manager is extremely busy and relies on a volunteer parent accountant, who experienced a family trauma, he added.
“Again none of this is to absolve us of responsibility but to explain human error when no one was directly responsible for this,” Gordon said.
“Everyone thought someone else was taking care of this,” he said, adding that it was “not anything intentional” or about “hiding of anything from public disclosure.”
Organizations with 501(c)3 designations will lose their tax exempt status from federal income taxes if they fail to file Form 990s for three consecutive years with the IRS. The forms provide basic information about a nonprofit’s expenses, revenues and salaries for top employees. They are also one of the only public documents private nonprofits are required to create about their finances.
The Compass School’s tax-exempt status was revoked automatically on Nov. 15. The IRS periodically updates a public list of organizations that have lost their status; it posted about Compass’ revocation on March 11.
The school’s failure to file its federal tax returns could also trigger a review process by the State Board of Education under new oversight regulations of independent schools passed just last year.
Gordon said he welcomes the board’s scrutiny and that it will give the school the opportunity to show its “totally solid record of financial stability and really good record keeping.”
“We just didn’t realize how essential it was to file this single form,” he said.
Roxane Blake, the current co-chair of the Compass board of trustees, expressed confidence in Gordon’s ability to resolve the issue and asked a reporter why the subject should be a story.
“I see the building operating, and teachers getting paid, and students happy,” she said.
Rick Cowan, the board’s former co-chair, said he was under the impression that an accounting firm had been doing the school’s tax returns, although he couldn’t remember their name.
“As far as we knew everything was getting done,” he said.
Compass is a small private school where enrollment hovers around 70 students. It bills itself as an alternative school, where “a variety of experiences both within and beyond the classroom help students develop the most important skills of all – adaptability, creative thinking, and genuine enthusiasm for their work.”
According to documents provided to VTDigger by the school, its budget this year stood at about $1 million.
An organization can remain a nonprofit under Vermont law without being a federally tax-exempt 501(c)3 organization, according to the Vermont Attorney General’s Office, and the Compass School remains a registered nonprofit with the state. But the loss of its status means it could be subject to fines, federal back taxes, and that any donations it receives until it is reinstated won’t be tax-deductible. Losing tax-exempt status can also impact a nonprofit’s ability to receive grants.
Reinstatement could be a lengthy and expensive process. Gordon said the school had contracted an outside accountant to file the necessary paperwork.
Compass was also the recipient in 2014 of a $1.1 million USDA loan, which helped the school refinance its debt and build an extension to its campus. A representative from the federal agency said the school was current on their loan, and that tax-exempt status was not necessary to receive such loans.
Compass receives about half of its revenue from publicly-funded tuition dollars, which school districts pay for when students in towns with school choice – like Westminster – decide to attend the private school. Between 2010 and 2018, the Compass School has received an average of $452,000 annually in tuition dollars from the state, according to data provided by the Vermont Agency of Education.
To keep receiving that funding, the school must be designated an “approved independent school” by the State Board of Education. The school, separately, is currently applying for re-approval. (Schools must do so every five years.)
Oliver Olsen, a state board member, said the school could expect “tough questions” from him when Compass next came before the board. The Form 990 is a “key indicator of a school’s financial capacity,” Olsen said, which the school must demonstrate to remain approved.
“I am shocked and deeply concerned about the apparent failure of the Compass School to submit these important financial disclosures over the past several years,” he wrote in a statement.
Bill Mathis, another state board member, agreed pointed questions would likely be raised.
“If you’re taking money, whether you’re public or private, you have to be accountable for it. And you have to follow the rules,” he said.
The subject of financial accountability for independent schools has been a hot-button issue in Vermont for some time.
The State Board sought for years to impose much stricter rules on private schools that receive public money, and were rebuffed by then-Gov. Peter Shumlin and Senate lawmakers. The rules attempted to place private and public schools on equal footing, and would have required private schools to accept all special education students, as well as required that schools provide more documentation on their finances to the state.
Gordon, a vocal school choice advocate, was stringently opposed to the board’s rules. The Heartland Institute, a conservative think tank, in a 2017 blog post quoted Gordon extensively, arguing that the proposed regulations would put independent schools out of business.
“The financial disclosure argument is a red herring about fiscal responsibility,” Gordon told Heartland. “I know of no financial malfeasance of independent schools. This, taken with the other provisions, could be construed as efforts simply to undermine independent schools.”
The Legislature eventually intervened, and wrote their own compromise regulations on independent schools, which were included in Act 173, a 2018 law mostly known for reforming special education. The law triggers a review process by the State Board when financial red flags pop up at private schools — including if schools fail to file their federal tax returns on time.
Senate Education Committee Chair Phil Baruth, D/P-Chittenden, a key figure in writing the new language around private schools, said Compass could serve as a test case.
“Now we’ll see how effective these measures are in terms of allowing [the State Board] the continued oversight that they need to figure out how bad the situation is,” he said.
