IRS Whodunit: Fingering the Flagrant Foundation

In a recent report on excessive executive compensation, clues to a major violation among private foundations. 

Early in March the IRS released parts one and two of a report on executive compensation in exempt organizations that focused on charities and private foundations (which are just two among a variety of exempt organizations recognized by Federal tax laws).  The IRS sent letters and conducted examinations at close to 2,000 organizations, which is something considering that in recent years the IRS typically examines about 3,000 exempt organizations.  Click on the image for my summary of the outcomes.

Public charities and private foundations share 501(c)(3) status although they frequently sit on opposite ends of the charity transaction—foundations give and charities get.  They are subject rather different treatement under the tax laws and have quite different reporting requirements—for instance, private foundations have their own Form 990PF, with different format and questions.  Accordingly, the selection process was different for the two groups.  And the findings for the two groups were signficantly different, although no mention of that is made in the summary.

Significantly different—even though private foundations accounted for only about a fifth of the organizations included in the process, they accounted for 80% of the proposed assessments, over $16 million out of $21 million assessed.  The report doesn't tell us how many organizations received proposed assessements, but on a per examination basis, the private foundations yielded twenty times as much as public charities.  And when one considers that the assessment for excess benefit is 20% of the excess, the misbehavior on the part of the private foundations must have been really substantial. 

Reading between the lines, the private foundations failed for reasons other than straight out compensation.  The report tells us that only 5% of the 27 foundations paid excessively (that's 1-1/3, so I suspect there's a rounding error).  The real problems were with other benefits based on using foundation assets for personal benefit.  The paragraph that provides the clue is this one:

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. In addition, seven private foundations provided loans or pledged collateral to or for the benefit of a disqualified person. [Emphasis added]

The difference in phrasing is the key:  on the foundation side, the abuse was sometimes subtler than compensation or direct loans, it involved insiders using foundation assets as loan collateral.  Of course.  Foundations usually have lots of bankable assets, and a lien on them would be easy to conceal. 

Though the IRS report cautions against projecting results of this study, I think there is plenty of reason to focus attention on private foundations rather than public charities in any study of compensation.  The most obvious: they have more money.  And donors and (self-appointed) watchdogs give plenty of attention to working charities.  Fewer pay attention to foundation compensation.  Finally, because of their investments, foundations are more likely to attract financially sophisticated staff who know how to derive benefit by means other than direct compensation. 

And a tip to some reporter:  the IRS report shows there's a big story out there of one or more foundations that messed up big time.  Of course the IRS can't reveal the identity, but we now know it's out there. 

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