IRS nonprofit compensation investigation nets $21 million

An Internal Revenue Service investigation into nonprofit executive compensation compliance has so far resulted in proposed excise tax assessments "in excess of $21 million against 40 disqualified persons or organization managers."

According to a March 2007 report just released, the IRS sent compliance check letters to 1,223 organizations and undertook separate examinations of 782 others. More than 30 percent of the organizations that received compliance check letters have subsequently amended their Forms 990 because they were incorrectly filled out.

"Although high compensation amounts were found in many cases," the report said, "generally they were substantiated based on appropriate compatibility data."

Still, the report recommends that "additional education and guidance, as well as training for agents, are needed in the areas of reporting requirements" and the procedures for nonprofits to use to establish appropriate compensation.

The report also recommends the Form 990 be changed "to reduce errors in reporting and provide sufficient information to enable the IRS to identify compensation issues."

The IRS Executive Compensation Compliance Initiative began in 2004 to review nonprofit compensation practices and uncover excess benefit abuses. These involve disqualified persons who receive "improper personal gain" from a tax-exempt organization. Rather than revoking the charity’s tax-exempt status, the IRS may impose an excise tax against the disqualified person and possibly the organization manager.