IRS Taking a Harder Look at Exec Pay at Nonprofits, Credit Unions Exempt from Scrutiny

WASHINGTON – The IRS is clearly taking a closer look at credit unions these days, but it looks like credit unions will be spared at least one emerging area at the IRS. Last fall, the IRS ranked executive compensation at nonprofit organizations as one of several areas that needed more scrutiny. This summer, the agency will begin a due diligence search that will take a closer look at how salary packages are set up and how they appear on income returns. “There are concerns that there may be excessive compensation,” said an IRS spokesman from the agency’s tax-exempt division. “Our goal is to ensure that income and assets are duly benefiting the individuals.” The spokesman said the IRS is in the final stages of rolling out a compensation initiative that will look more broadly at C3 and C4 groups, which includes churches, schools, universities, social welfare organizations and homeowners’ associations. Under Section 4958 of the IRS Code, credit unions are considered C14s and will not be looked at by the IRS although they are tax-exempt entities, he said. Executives or board members at nearly 200 nonprofits have already been identified for closer inspection, Steve Miller, director of the IRS’s exempt-organizations division recently told the Wall Street Journal. The spokesman said the groups will be contacted this summer to receive education and guidance but enforcement will also occur. While the IRS has the power to revoke a nonprofit’s tax-exempt status, it would take an act from Congress to allow the agency to target federally-chartered credit unions. In 1977, the IRS came close to revoking a New Hampshire credit union’s tax exemption but a federal court ruled that it had met all requirements to maintain that status, the IRS spokesman said. Indeed, for credit unions, the news is timely given the IRS’ April 9 private letter ruling that allowed a federally-chartered credit union to offer one of its executives a 457 deferred compensation plan using a for-profit, more tax-friendly model. The spokesman said the letter came from the IRS employee plans division and could not offer any further comment, only saying that private letter rulings do not set a precedent. In determining what an individual will be paid, nonprofits generally should look at similar organizations with attributes that closely mirror their own, the IRS spokesman said. The duties, career experience and job requirements of a comparable individual at a similar organization can also be used as a guide in determining salary and benefits. “Hypothetically, looking at a credit union, a comparable institution would probably be a bank performing similar roles,” the spokesman said. IRS’ enforcement authorities with nonprofits for excessive compensation are still fairly new, and while there a few pending court cases, the individual does have the right to due process including requesting an appeal, the spokesman said. An audit typically reveals red flags, which has led to nonprofits’ tax-exemption being revoked in the past. If tax-exempt Sec. 501(c)(3) and Sec. 501(c)(4) organizations fail to properly report compensation for certain employees, it may result in intermediate sanctions penalties under Section 4958 of the regulations assessed against the “influential” or “disqualified persons,” according to the IRS. Influential persons are those that receive benefits, such as compensation, fringe benefits or contract payments. A disqualified person is any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization at any time during a five-year period ending on the date of the transaction he or she was involved in. This category also includes persons who hold certain powers, responsibilities or interests and are among those who are in a position to exercise substantial influence over the affairs of the organizations. There are nearly 1.8 million U.S. nonprofits and 29 categories of tax-exempt organizations, according to the IRS. [email protected]