Exempt Organizations Advisory - IRS Releases Results of Exempt Organizations Executive Compensation Study

Today, the Exempt Organizations Office of the Tax Exempt and Government Entities Division of the IRS released Parts I and II of its Report on Exempt Organizations Compensation Compliance Project ("the Project"). The Project, which was implemented in 2004 to review compensation practices of exempt organizations in order to identify tax administration concerns and potential areas of abuse in the exempt sector, includes three parts: Part I, involving compliance check letters sent to 1,233 organizations; Part II, a separate project involving examinations of 782 organizations; and Part III, which will be released at a later date.

The IRS summarized the Project’s findings as follows:

• Significant reporting issues exist – Over 30% of compliance check recipients amended their Forms 990. Fifteen percent (15%) of the compliance check recipients were selected for examination.
• Examinations completed to date do not evidence widespread concerns other than reporting. However, as this was not a statistical sample, no definitive statement can yet be made concerning the compliance level in this area. Continued work in the area of executive compensation is warranted.
• Where problems were found, significant dollars are being assessed (25 examinations have resulted in proposed excise tax assessments under Chapter 42, aggregating in excess of $21 million, against 40 disqualified persons or organization managers.)
• Although high compensation amounts were found in many cases, generally they were substantiated based on appropriate comparability data.
• Additional education and guidance, as well as training for agents, are needed in the areas of reporting requirements, and the "rebuttable presumption" procedure that may be relied upon by public charities to establish appropriate compensation.
• Changes in the Form 990 series are necessary to reduce errors in reporting and provide sufficient information to enable the IRS to identify compensation issues.
• Part I and Part II utilized new compliance contact techniques, which have since been refined in later projects such as Credit Counseling and Down Payment Assistance.
• Using those refined techniques and concentrating on particular industries, demographics and governance practices in future efforts should allow the IRS to better assess and understand compliance levels and enable the IRS to identify and concentrate its efforts on noncompliant taxpayers.

Additional information regarding the Project’s findings, as well as "Lessons Learned and Recommendations," can be found at http://www.irs.gov/pub/irs-tege/exec._comp._final.pdf .