Tax and Employment Issues Affecting Nonprofits – November 14, 2008

Yesterday, I filled in for an IRS speaker at a continuing legal education program on "Tax and Employment Issues Affecting Charitable Nonprofits" at the Bar Association of San Francisco.  Rebecca Benhuri, an associate attorney with Jackson Lewis LLP, focused on the employment issues, and I covered the following IRS areas of interest:

  • Governance
  • Effectiveness and Efficiency
  • Redesigned Form 990
  • Executive Compensation

The IRS is interested in governance, even though it may be principally a matter of state law, because there is a "nexus between good governance and tax law compliance."  The IRS's role in this area is to educate and promote transparency.  Among the governance and management policies they recommend:  executive compensation, conflict of interest, investment, fundraising, documentation of governance decisions, document retention/destruction, and whistleblower.  See the IRS publication on Governance and Related Topics – 501(c)(3) Organizations.

Effectiveness and efficiency are also key areas of interest.  The IRS failed to keep certain efficiency indicators as part of the summary page of the redesigned Form 990 in large part because such information could be misleading and result in unfair evaluations of, and comparisons between, charities.  However, the idea of efficiency indicators remains very much alive.  Moreover, the IRS is bringing back from the dead the commensurate test.

The redesigned Form 990 will be implemented next year for the 2008 tax year.  The last significant redesign of the Form was in 1979, so this is long overdue.  The redesign was accomplished with three guiding principles:  (1) enhancing transparency; (2) promoting tax compliance; and (3) minimizing the burden on the filing organization.  The new Summary section on page 1 provides a snapshot of the organization (including two years of key financial data) and may serve as a vetting tool for potential funders.  Also new are questions about whether the organization has implemented certain governance and management policies and more rigorous questions about compensation.  Much more on the Form 990 can be found on the IRS website.

The IRS released a report on its Executive Compensation Compliance Project in March 2007.  Among the findings:  25 of 782 exams resulted in proposed excise taxes of $21 million.  Compensation by charities must be reasonable and must not confer a prohibited private benefit to any individual.  If more than reasonable compensation is paid to a disqualified person (such as a director or officer), intermediate sanctions (excise taxes under IRC Section 4958) may be imposed on the disqualified person and on the organizational managers who knowingly approve of such excess benefit transactions.