Nonprofit arts leaders and staff responsible for payroll, hiring, governance, or financial reporting may want to keep an eye on the IRS in the coming months (more than usual, that is). Last month, they issued an advisory that they will be scrutinizing executive compensation practices for nonprofits, beginning with about 2000 throughout the sector (arts among them, one would think).
According to the IRS official quoted in the release:
”We are concerned that some charities and private foundations are abusing their tax-exempt status by paying exorbitant compensation to their officers and others,” said Mark W. Everson, Commissioner of the Internal Revenue Service.”Particular organizations that we contact may or may not have problems in the compensation area, but specific aspects of their operations have raised questions that must be answered,” he said. ”The IRS has an obligation to investigate questionable compensation practices and put a stop to abuses we find,” he said. ”We won¹t let the misbehavior of a few organizations damage the credibility of the vast majority of law-abiding charities and foundations.”
According to a nonprofit alert from accounting/consulting firm GrantThornton, the review will also extend beyond actual compensation to include any excess financial priveleges received by executives (called ‘automatic excess benefit transactions,’ catchy, huh?):
These arise when organizations pay personal expenses for insiders and fail to satisfy the technical requirements in the tax regulations to properly document payments as compensation.
In some examples of abuse, according to GrantThornton, organizations ‘allowed insiders to use credit cards, cell phones, vehicles and residences without properly accounting for personal use. None of these items were reflected on Form W-2 or 990 as compensation,’ but they were determined to be a form of compensation nonetheless.
It’s dry stuff, to be sure, but an important part of living la vida nonprofit.