Pay attention to your Form 990 or expect a letter from the IRS
By Steven L.F. Ho
Over the past two years, the Internal Revenue Service has engaged in an effort to identify and halt abuses by tax-exempt organizations that pay excessive compensation and benefits to their officers and other insiders.
The IRS's Tax Exempt Compensation Enforcement Project is reviewing how compensation is determined and reported, loans to executives, compensation as compared to assets and other so-called sweetheart deals between executives and exempt organizations.
The project contacted more than 1,800 organizations. Of these, 1,225 were sent compliance check letters and 600 examinations were conducted. The compliance check letters were triggered by discrepancies on the Form 990s filed by exempt organizations. Specifically, these discrepancies on 990s resulted in letters from the IRS:
- Part IV, Line 50 (Balance sheet disclosure of receivables from officers, directors, trustees and key employees) – There was no explanation or schedule explaining the receivables.
- Part V, Column B (Compensation paid to officers, directors, trustees and key employees) – The organization left the amount blank. If no compensation was paid, enter "0."
- Question 89(b) (Whether the organization engaged in any excess benefit transactions during the year or became aware of excess benefit transactions from a prior year) – The organization didn't answer the question or answered "yes" with no explanation.
- Schedule A, Part III, Question 2 (Whether the organization engaged in certain acts with disqualified persons) – Filer did not answer the question or answered "yes" without explanation.
Nonprofits should be aware that improper completion of Form 990 in the above areas may trigger additional IRS scrutiny.
The IRS has observed that the project has heightened organizations' sensitivity about how compensation is set and reported – so expect to see more of this approach in the future.
The IRS also noticed a practice of spreading compensation among several affiliated organizations, with only a small amount reported on any one return. To address this issue, the IRS expanded question 75 on Form 990 to collect information on compensation paid by related organizations.
Finally, the IRS discovered a substantial number of loans to insiders and undocumented loans. As a result, expect the next phase of the compliance project to focus on loans made to insiders. Such loans are illegal in Hawai‘i under state law.
Steven L.F. Ho is an attorney at Torkildson, Katz, Fonseca, Moore & Hetherington who specializes in nonprofit law. To receive his Nonprofit Law Alerts, email him at slh@torkildson.com and include your name, organization, mailing address and email address.
