WASHINGTON — An Internal Revenue Service official warned nonprofits to be mindful of executive-compensation practices amid public ire over large bonuses at insurer American International Group Inc. and other Wall Street firms that have received federal aid.
Lois Lerner, the IRS’s director of tax-exempt organizations, told a gathering of lawyers representing charities Monday that scrutiny of nonprofits’ pay practices is likely to increase. Nonprofit leaders should be sure to practice due diligence in making sure their executive pay can be justified through data on comparable practices at similar organizations, she said.
“If you’re not looking, we’re looking,” Ms. Lerner said at Georgetown University Law Center’s Representing & Managing Tax-Exempt Organizations conference here.
The IRS has intensified oversight of charities recently, through reports and an overhaul of nonprofits’ annual tax form.
Ms. Lerner said a recent IRS report on nonprofit hospital pay “raised some eyebrows.” The report, which surveyed 489 institutions, found pay for the top official at nonprofit hospitals averaged $490,000 a year. Among a select 20 hospitals that paid relatively higher amounts, the compensation figure averaged $1.4 million. The IRS declined to name the hospitals.
Nonprofit pay packages pale in comparison to some of those doled out to Wall Street executives. But a series of charity scandals in the past few years has focused attention on executive pay. Republican Sen. Charles Grassley of Iowa, the ranking member of the Senate Finance Committee, has questioned some nonprofit executive pay practices. Others have said charities’ tax-exempt status – essentially a large taxpayer subsidy – could give rise to more scrutiny in the current political climate.
Ms. Lerner of the IRS said the agency’s redesign of charities’ annual tax form – known as Form 990 – will make it easier for people to find information on executive pay. That makes it incumbent for charities to pay close attention to their pay policies, she said. The new form provides “a lot more information” on executive pay, she said.
The new form, redesigned for the first time in some 20 years, triggers detailed disclosures of various compensation perks under certain circumstances, such as when an employee makes more than $150,000. Among the compulsory disclosures: First-class air travel, expense accounts, housing allowances and the use of bodyguards, chauffeurs and personal lawyers.
Ms. Lerner urged charities to make certain governance practices public, to assure Americans they’re using their tax-exempt money appropriately. The tax-exempt sector’s stability “demands the public trust,” she said. “If we lose the public’s confidence in the sector, we’ve lost it all,” she said.
Ms. Lerner added that the IRS’s exempt organizations division is about to get more staff, who will provide guidance to nonprofits on complying with new regulations, among other things. The staff, in the so-called “rulings and agreements” arm, also decides whether to grant tax-exempt status to organizations. Critics have long pointed to staff shortages at the IRS as one reason some charities fail to comply with various rules.
Here is info to report suspected IRS Fraud: http://www.irs.gov/individuals/article/0,,id=106778,00.html
If you suspect or know of an individual or company that is not complying with the tax laws, you may report this activity by completing Form 3949-A. You may fill out Form 3949-A online, print it and mail it to:
Internal Revenue Service
Fresno, CA 93888
If you do not wish to use Form 3949-A, you may send a letter to the address above. Please include the following information, if available:
*Name and address of the person you are reporting
*The taxpayer identification number (social security number for an individual or employer identification number for a business)
*A brief description of the alleged violation, including how you became aware of or obtained the information
*The years involved
*The estimated dollar amount of any unreported income
*Your name, address and daytime telephone number
Although you are not required to identify yourself, it is helpful to do so. Your identity can be kept confidential.
Frequently Asked Questions – 1.13 IRS Procedures: Reporting Fraud
How to Report Abusive Tax Promotions and/or Promoters:
Complete the referral form which documents the information necessary to report an abusive tax avoidance scheme. The form can be mailed or faxed to the IRS address and fax number on the form.
While charitable organizations are permitted to arrange executive compensation agreements, “unreasonable” compensation to a disqualified person will be considered an excess benefit, subjecting the disqualified person and members of management who approved the transaction to penalties under section 4958 of the Internal Revenue Code known as “intermediate sanctions.”
The IRS uses the term “disqualified person” to describe “any person [including a corporation] who was, at any time during the five-year period ending on the date of [the] transaction, in a position to exercise substantial influence over the affairs of the organization.” For example, voting board members, officers, directors, staff members with ultimate decision-making authority, and highly compensated employees are considered disqualified persons.
Any payment determined unreasonable by the IRS must be corrected. Not only will the payment have to be returned by the disqualified person, the disqualified person will pay a penalty of 25% of the excess benefit (an additional 200% may be imposed if not paid within 90 days), and members knowingly involved in the excess benefit transaction may be subject to a penalty of 10% of the excess benefit. Even if the charitable organization that granted the excess benefit transaction no longer exists, the disqualified person is still required to correct the excess benefit, generally paying the amount to another 501(c)(3) organization in accordance with the original charitable organization’s dissolution clause.
Other than the general standard that the compensation should be what is ordinarily paid for like services, by like enterprises, under like circumstances, the IRS has yet to establish more detailed instructions for calculating reasonable compensation. Therefore, it is extremely important organizations exercise their best efforts to execute reasonable compensation agreements.
In its report, “Strengthening Transparency Governance Accountability of Charitable Organizations,” the Panel on the Nonprofit Sector recommends charitable organizations to approach the required Form 990 or 990 PF filing as an opportunity to undertake a full review of its organizational and governing instruments, key financial transactions, and compensation policies and practices at least once every five years.
Furthermore, the Panel highlights that the executives of charitable organizations have some responsibility in preventing an excess benefit transaction from occurring. The governing board or other authorized body approving the compensation should be accountable for the process used in the overall determination of reasonableness. They should not shift the burden to the IRS of demonstrating the compensation is excessive.
The Panel also strongly encourages charitable organizations to adopt a requirement that the board of directors approve CEO compensation annually prior to the payment of the new compensation level as part of their bylaws or governing documents. For example, if the board elects to exercise a multi-year CEO contract in which compensation is increased periodically or upon meeting specific performance measures, the board should institute a regular process for reviewing whether these terms have been met. Even if the board designates a separate committee for CEO compensation and performance review, the Panel suggests that the committee’s report regarding its findings and recommendations should be subject to the full board’s approval.
(Dear Friends of the Weeping Ivy…here is the next step. Take it. You now have the name and contact. Remember, they got Al Capone for tax evasion, not murder.)
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