Ask Moss Adams Excess Benefits

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Presentation Title Presenter name Date, 2003 for Not-For-Profits Welcome To Audio Conference 1-866-548-4705 Participant Code: 673044 After signing in, please mute your phone by pressing *6.

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Today’s Topic Excess Benefits & Executive Compensation

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Instructions Please keep speakerphones on mute Technical questions during the event, email jamie.flores@mossadams.com Questions for presenter Submit your question using the “chat” function Questions for presenter during Q&A will be selected by host.

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About Today’s Presenters Paul Keller – Partner (Eugene) Suzanne Taylor – Partner (Portland) Rich Croghan – Partner (San Francisco) Leslie Richardson – Director (Seattle)

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What Are Excess Benefits?

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Excess Benefits Defined Any transaction in which the tax-exempt organization provides directly or indirectly an economic benefit to a disqualified person in excess of any consideration received from the disqualified person.

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What Does That Mean? When the organization gives a disqualified person a benefit or compensation (or both) that is of greater value than the services that person provides to the organization – it’s an excess benefit.

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Who Is Disqualified? Anyone in a position to exercise substantial influence over the affairs of the organization

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Disqualified Persons

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Also Disqualified An outside entity in which a disqualified person has at least 35 percent ownership

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Types of Excess Benefits

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Monetary

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Personal Use

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Miscellaneous These types of economic benefits are frequently misreported

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Miscellaneous

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What Are The Consequences?

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Tax Penalties A 25 percent initial tax penalty on the excess benefit is imposed on the disqualified person.

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Tax Penalties If not corrected (paid back) within the taxable period, there is an additional tax penalty of: 200 PERCENT

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Tax Penalties Organization managers could face a 10 percent tax penalty (up to $10,000) for knowingly approving an excess benefits transaction.

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Penalties are paid by the individual, not the organization Tax Penalties But, the organization must disclose the excess benefit transaction to the IRS.

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The disqualified person must repay the excess benefit to the organization with interest, PLUS The initial penalty tax still applies, unless the organization can prove “reasonable cause.” Correcting the Transaction

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The IRS What Have They Been Up To?

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Increased the size of its Exempt Organization (EO) Division IRS Activity EO Division budget increase 23 percent

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IRS Activity Increased audits of tax-exempt organizations

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IRS Activity Initiated a federal/state compensation compliance group conference

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Initiated the Tax-Exempt Compensation Enforcement Project IRS Activity

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Enforcement Project What They Did Contacted approximately 2,000 tax-exempt organizations with inquiries about compensation paid. Conducted audits of the selected organizations

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Enforcement Project What They Found Executives hiring family members at generous salary for little work. Organizations covering executives’ personal expenses. Large organizations paying significant salaries unsupported by comparable value. Questionable loan transactions.

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Real World Examples

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Real World Examples Portland, OR Large local NFP organization E.D. highly paid (over $800k) Massive media coverage Public outrage Audited by A.G. E.D. ultimately took 25% pay cut

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Real World Examples Washington D.C. Private university Anonymous letter to Board alerted to possible abuse of travel and personal expenses Investigation and independent audit conducted Audit committee found $500k of inappropriate spending President ultimately resigned

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Real World Examples Others?

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How To Protect Your Organization

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Compensation decisions must be approved by your board Safe Harbor

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The board must obtain comparable data from a third-party source Safe Harbor

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Document, Document, Document Safe Harbor These actions create ‘rebuttable presumption of reasonableness’

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One Other Option Good luck with that ! ! ! If you choose not to use Safe Harbor, you can use “facts and circumstances”

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Panel on Nonprofit Sector on Executive Compensation

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Board Compensation No board member compensation No loans to board members

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Board Compensation Require additional disclosure related to board compensation Require disclosure of process used to determine “reasonableness”

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Board Compensation “Congress should increase penalties imposed for excessive compensation”

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Executive Compensation Base pay, bonuses, benefits should be clearly disclosed Full board should approve changes in advance

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Executive Compensation Must be able to demonstrate “reasonableness” to IRS If no ‘rebuttable presumption’ exists, penalties increase

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Travel Expenses Establish and enforce travel policies Disclose travel policies in IRS Form 990

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Travel Expenses No reimbursement for non-employees (family, friends, etc.) Reimbursement instructions include non-permitted costs

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Governing Board Compensation not set by other board members No members related to compensated employee IRS Form 990 require disclosure of independence Minimum three members At least 1/3 of members independent No compensation or material benefit

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Q&A

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Next Session “10 Things NFP Board Members Should Know” By Lynn Kingston, CPA May 18, 2006 9:30 am