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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
A three-year study of executive compensation compliance by the IRS Tax Exempt and Government Entities (TE/GE) Division revealed that significant reporting issues exist despite the good intentions displayed by exempt organizations to properly report executive compensation, according to Ronald Schultz, Senior Technical Advisor to the Division.
According to Schultz, the study, based upon compliance letters to 1200 organizations and audits of Form 990 (Return of Organization Exempt From Income Tax) and related returns for 800 organizations, revealed that although 98 percent of the organizations properly used independent sources to study their executive compensation to create a rebuttable presumption against an excessive benefits determination, many of those same organizations failed to follow through and adequately document their basis for determining that the compensation was not excessive. Schultz applauded the fact that most organizations attempted to adopt policies to ensure reasonable executive compensation, but he reported that the translation of that attempt into hard data that should appear on required tax forms was significantly inadequate. One-third of the entities the IRS examined incorrectly or incompletely reported compensation to the point that they had to amend their Forms 990. Finally, while only 5 percent of the organizations examined were actually found to have excessive executive compensation, proposed assessments for these approximately 40 organizations reached the $21 million level.
As a result of the study, the IRS plans to provide a list of common reporting errors to assist compliance by exempt organizations. In addition, Schultz reported that the IRS plans to continue efforts to educate both its agents and the public at large about the rebuttable presumption rule regarding excessive executive compensation. Schultz announced that the IRS is aiming to release by June drafts of the much-awaited new Form 990, which would assist in reducing some of the errors found by the Executive Compensation Compliance Initiative.
From the point of view of a practitioner in the area, Nancy Kuhn of Powell Goldstein LLP, Washington, DC, the results of the TE/GE report illustrate how the IRS is not particularly opposed to high salaries in general, only "unreasonable compensation." Executives working in the nonprofit sector are not expected under the law to work for less than their for-profit counterparts and the IRS is not attempting to determine reasonableness based purely on a high salary level. Nevertheless, Kuhn acknowledged that there is a definite political aspect to the debate, with Senate Finance Committee ranking member Charles E. Grassley (R-IA) leading the charge in remarking that "the IRS study and the recent revelations of the champagne lifestyles of certain nonprofit executives make it clear that the IRS needs to send clear signals of what's acceptable for disclosure and compensation at our nation's charities."
Kuhn and Susan Cobb, also of Powell Goldstein LLP, added that they have noticed in their practice that the issue of high compensation has also begun to attract the attention of regulators, both on the federal and state levels. "There is a lot more audit activity by the IRS in this area than two years ago," Kuhn said. She estimated that this increase is magnified by media reports on the issue, capturing the attention of congressional leaders who, in turn, place pressure on the IRS to improve compliance in this area. Kuhn noted that Grassley has requested a report from the IRS by April 1, 2007, on the top 20 issues of noncompliance in the areas of public charities and private foundations. Cobb added that executive compensation compliance issues have also attracted examinations from state attorney generals who are concerned with the fiduciary responsibility of insiders of tax-exempt organizations. Cobb and Kuhn also observed that the prohibitions on excess executive compensation and loans to disqualified persons under the Pension Protection Act of 2006 (P.L. 109-280) are strikingly similar to the required internal controls under the Sarbanes-Oxley Act of 2002, even though the latter is not directed at tax-exempt entities. They noted that the IRS has been circulating unofficial draft guidance on corporate governance for tax-exempt entities.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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