IRS Enforcement of Charity Reporting Pays Off (at Least in Dollars)

The IRS claims to have collected $20 million from forty individuals as a result of excise taxes on excessive pay from a charity. 

The New York Times (Stephanie Strom) reports that the IRS sampled 1,800 charities Form 990s for review and found errors in reporting compensation in 600 of them.  In addition, it has charged an excise tax on excessive pay for forty individuals, amounting to $20 million.

Intermediate sanctions regulations, sometimes identified as section 4958, impose a 25% excise tax on individuals found to have received excessive compensation from a charity.  There is an additional 200% excise tax imposed if the excess is not corrected.  Excessive compensation can be found if an organization does not justify and document the compensation based on reference to comparable organizations.  It is called intermediate sanctions because it represents a less severe penalty than termination of an organization's tax-exempt status. 

From the IRS guidance on intermediate sanctions, excess compensation is not only a matter of direct compensation, it can also involve transactions such as personal use of automobiles, sale or lease of property at inflated rates, and loans to insiders. 

And speaking of incorrect Form 990s, the article takes note of our posting last week (Yale's Wacky Form 990, February 21, 2006) that questioned Yale's reporting of overall income and expenses. 

But the real focus of the Form 990, it seems, is compensation.  One of the more obvious reforms in charity accountability would be a more coherent and consistent method of reporting in this area.  The IRS puts bits and pieces of compensation reporting throughout the Form 990 and Schedule A.  The space provided in the Form 990 itself is not large enough, so organizations typically include the information in an attachment somewhere at the end of the report that they format any way they please. 

But another model that would even be more helpful than a schedule showing compensation is that of the proxy statement issued by public companies under SEC regulations.  Like this one from General Electric, it provides a summary not only of compensation but also the process by which it was determined, along with background information on the board of directors and a summary of corporate governance.  Even a small scale charity should be able to provide this information.   

Comments

[Ann Bares]

I applaud your suggestion that executive compensation disclosure in 990s be structured similar to what is done with public company proxies. Otherwise, potential donors and the public at large do not have the information needed to gauge whether a charity is exercising sound financial stewardship in this area.

[Lisa]

As an executive of a small nonprofit I think it is a very good measure to hold everyone accountable and keep the information honest and forthcoming. Too many get too big too fast and forget the very nature of their nonprofit. People are usually shocked to see how little I really make!