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IRS to Examine Nonprofit Executive Pay

(May 31, 2004) The director of exempt organizations for the Internal Revenue Service (IRS) has said that the agency plans to take a close look at how much top executives at nonprofit organizations are being paid.

Speaking last week at a conference in Washington, D.C., Steve T. Miller indicated that the IRS will be contacting hundreds of nonprofits over the summer and asking them to justify the amount of money paid to their executives. The questioning ultimately may lead to audits for some organizations.

While rules on intermediate sanctions and executive compensation have been in place for several years, this renewed effort is apparently in response to Congressional and public outcry over excessive compensation in the nonprofit sector. Scandals in the for-profit sector and the passage of the Sarbarnes-Oxley corporate accountability bill have also been contributing factors.

Under the intermediate sanctions rules governing executive compensation, nonprofits can justify an officer's compensation by demonstrating that they compared their compensation levels to other, similar organizations. Nonprofits can use both for-profit and nonprofit data when making their comparisons and deciding upon an appropriate compensation level.

The IRS has already identified approximately 200 nonprofit organizations that pay an officer or executive more than $1 million annually, according to the Chronicle of Philanthropy. Other nonprofits may be questioned if the IRS determines their level of compensation for top executives exceeds that of nonprofits of similar size and mission.

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