The IRS has a new weapon aimed at excessive compensation for executives of charitable organizations, social welfare organizations and institutions of higher learning. Any organization exempt under Sec. 501(c)(3) or (4) should know the risks these new rules impose.
The Service can now levy stiff penalties against executives whose compensation exceeds the value of the services they provide to an organization. In the past, the IRS's only recourse on a finding of unreasonable compensation was to revoke an organization's tax-exempt status.
Under Prop. Regs. Sec. 53.4958-1, intermediate sanctions can be as severe as 25% of an individual's excess compensation. In addition, if the excess compensation is not paid back, the Service can impose an additional tax of 200% of the excess compensation.
For board members, directors, trustees or others with similar responsibilities, who knowingly and willingly approve unreasonable compensation, the IRS can impose a punitive tax of 10% of the excess benefit, not to exceed $10,000 on any one transaction.
If the Service imposes penalties, under Prop. Regs. Sec. 53.4958-4, the details (including names and amounts) must be shown on Form 990, Return of Organization Exempt from Income Tax under Section 501(c)(3), which is available to the public. To reduce the risk of a potential public relations disaster, organizations should carefully evaluate their compensation arrangements.
Prop. Regs. Sec. 53.4958-4 defines what is reasonable as "an amount as would ordinarily be paid for like services by like enterprises under like circumstances." The difficulty is that criteria on reasonableness can vary, depending on the nature of an organization, the region in which it operates and a host of other factors...