Articles

Background. In 1996, Congress enacted Code Sec. 4958, the intermediate sanction on excess benefit transactions. An excess benefit transaction occurs when a disqualified person receives improper personal gain from an exempt organization. Rather than revoking the organization’s tax-exempt status, Code Sec. 4958 allows the IRS to impose an excise tax against the disqualified person and possibly the organization manager. IRS issued final Code Sec. 4958 regulations in 2002.

 

Subsequently, the Exempt Organizations Office of IRS's Tax Exempt and Government Entities Division (EO) created the Intermediate Sanction Committee to coordinate and address Code Sec. 4958 issues. In 2004, EO formally implemented the Executive Compensation Compliance Initiative (the Project) to review compensation practices of exempt organizations. The Project encompassed Forms 990 and related returns for tax years beginning in 2002, and was divided into three parts.

 

The March 2007 report discusses Part I, involving compliance check letters sent to 1,223 organizations, and Part II, a separate project involving examinations of 782 organizations.

 

Key findings. The Project showed mixed results on reporting and compliance by the contacted organizations. The compliance checks uncovered significant reporting errors and omissions in specific areas, particularly excess benefit transactions and transactions with disqualified persons, as well as potential compliance issues related to loans made to officers. Key findings and recommendations include the following:

 

• Forms 990 and 990-PF reporting issues. The compliance checks revealed that many organizations were initially confused when completing the forms or did not understand the instructions. However, after receipt of the compliance check letter, 49% of the organizations provided additional clarifying information that did not require changes to their returns or schedules. Thirty-one percent filed amended returns or schedules as a result of the compliance check contact. Fifteen percent were selected for examination based on their responses.
• Compensation issues. Significant reporting errors and omissions were found when it came to compensation paid to officers or other employees. For example, out of 50 public charities reporting compensation over $250,000, none initially filed schedules detailing the compensation paid to officers or employees.
• Loans to officers and employees. Of 100 public charities reporting loans over $100,000 to officers, directors, trustees, and key employees, 92 involved issues determined to warrant follow-up, and, ultimately, 37 were referred for examination. Among issues highlighted were 53% of the loans were made with terms more favorable than commercial loans and 31% were not repaid in accord with the stated terms.
• Exam results. Completed examinations did not evidence widespread concerns other than reporting. Where problems were found, significant dollars were assessed (25 exams resulted in proposed excise tax assessments of over $21 million, against 40 disqualified persons or organization managers.)
• More guidance and training needed. Additional education and guidance, as well as training for agents, are needed in the areas of reporting requirements.
• Form changes needed. The IRS study found that Form 990 compensation reporting needs to be revised to facilitate accurate and complete reporting, with a focus on reducing the number of places the same information is reported on the form, providing clearer instructions regarding what needs to be reported, and requesting specific information to identify potential non-compliance areas such as loans to officers and directors.

 

Of note: This study has prompted Sen. Chuck Grassley (R-IA), ranking member of the Senate Finance Committee, to conduct a wide-ranging review of non-profit practices to ensure accountability from non-profits to taxpayers and donors, and to protect non-profits from abuse. This review, in turn, could lead to new crackdowns on tax exempts.

 

If you have any questions on how this might affect your organization or members of a board on which you serve, please contact Marc Azar or Sarah Talley at 404.874.6244.