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THE IRS AND EXECUTIVE COMPENSATION
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By Gavin Fox, CPA – Senior Accountant
In a recent article entitled "IRS to All Nonprofits: Pay Your Taxes and Document Your Pay!" Guidestar.org conveyed the results of recent Internal Revenue Service (IRS) audits of nonprofit agencies. While the IRS report focused on institutes of higher learning, the IRS suggested certain significant issues are prevalent across the nonprofit sector and should be investigated during an audit. One such issue was establishing compensation for officers, directors, trustees, and key employees and the use of appropriate comparability studies.
The executive compensation standard is based on reasonableness. The nonprofit sector can enjoy a "rebuttable presumption of reasonableness" by 1) using an independent body to review and determine the amount of compensation; 2) relying on appropriate comparability data to set the compensation amount; and 3) contemporaneously documenting the compensation-setting process. The key to appropriate comparability data is based on like services (substantially similar duties and responsibilities), like enterprises (similar size, such as number of employees, individuals serviced, budgets and revenues), and lastly, like circumstances (apples to apples comparison of items included in definition of compensation, as well as geographic location).
To effectively navigate these requirements, many nonprofits are adopting a formal compensation policy specific to the organization, including evaluation criteria, comparability information, and incentive and benefits packages. Further, organizations are creating compensation committees within the board of directors that is familiar with the requirements and can devote the necessary due diligence required under the regulations.
These items are significant because the IRS Form 990 requires disclosure on the compensation process and failing to adhere to the prescribed regulations could result in penalties and taxes. If you are uncertain if your organization is in compliance with the IRS standards, or would like assistance implementing these procedures, we would be pleased to provide our assistance.
Source: Lampkin, Linda. "IRS to All Nonprofits: Pay Your Taxes and Document Your Pay!" Guidestar.org, June 2013.
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If you have any questions regarding the article above or any other issue affecting your not-for-profit organization please contact your Blue & Co. advisor or e-mail us at blue@blueandco.com or call us at 800-717-BLUE
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CIRCULAR 230 DISCLOSURE: To ensure compliance with recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including any attachments, is not intended or written by us to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the federal government or for promoting, marketing or recommending to another party any tax-related matters addressed herein. |
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