Over the last decade, the IRS has assumed a broader role in the governance of tax-exempt organizations and embraced the view that transparency leads to tax compliance. Nowhere is the IRS’s approach more evident than in the area of executive compensation. The IRS asks tax-exempt organizations to provide detailed information annually on their Forms 990 regarding the compensation paid to executives as well as the compensation policies and practices that organizations follow. The information submitted can lead to compliance checks or examinations by the IRS.
In setting executive compensation, each charitable organization should be aware of the rules that apply to it. Special excise tax provisions apply to public charities (as well as section 501(c)(4) social welfare organizations) that provide excessive compensation to certain persons under the excess benefit transaction rules of Internal Revenue Code section 4958. The private foundation self-dealing rules of Internal Revenue Code section 4941 prohibit the payment of unreasonable compensation to certain persons by a charitable organization classified for federal tax purposes as a private foundation.