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IRS To Investigate Charity Salaries, Benefits

(Aug. 16, 2004) The Internal Revenue Service (IRS) has announced a new project to crack down on excessive compensation and benefits in the charitable sector.

The Tax Exempt Compensation Enforcement Project will examine the compensation behavior of nearly 2000 tax-exempt organizations. The project has four major purposes:

  1. Identify organizations with individuals who are highly compensated in comparison to the organizations' assets.
  2. Get information that could be helpful in the redesign of Form 990.
  3. Learn more about the practices and procedures involved in setting compensation.
  4. Increase awareness of tax issues as organizations set compensation in the future.

Tax-Exempt/Government Entities Commissioner Steven Miller said that some of the organizations identified will be asked to detail current compensation practices. Others will receive specific inquires based on information reported on their Form 990. If the information received from the organization is in order, then the review will be closed. Otherwise, the organization risks receiving a fine or losing its tax-exempt status.

However, the IRS wants to make a clear that if it contacts an organization, there is no implication of wrongdoing or impropriety. At the same time, organizations are advised that they should take the inquiry seriously and not treat it as just an information gathering session. Some nonprofit consultants are advising their clients to do their own internal reviews of compensation and review issues, such as rebuttable presumption and reporting procedures for the Form 990.

Insider transactions in the charitable sector were the focus of a June 22 hearing by the U.S. Senate Finance Committee. During the hearing, committee chair Charles Grassley (R-Iowa) said, 'It's good to see the IRS looking into this neglected area. The closer we look at charities in our finance committee, the stronger the case gets for meaningful legislative reforms that shut down exorbitant pay for charity executives and sweetheart deals for insiders.'

The project began at the end of July 2004 and will continue into 2005. The IRS has indicated that it intends to provide status reports as the project proceeds. Updates will be included in eWire as they become available.

For more information on the project, visit the IRS website.

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