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IRS Report Identifies Executive Compensation Problems

March 7, 2007

The results of the Internal Revenue Service Exempt Organizations Executive Compensation Compliance Project, released on March 1, spotlight problems with inaccurate and incomplete reporting on Form 990. According to the IRS report, almost one third of organizations contacted by IRS needed to amend their information returns. 

The Exempt Organizations division of the IRS released the first two parts of a three-part project to review compensation practices of exempt organizations, pinpoint tax compliance issues, and identify areas of abuse. Part I of the project involved compliance check letters sent to 1,233 exempt organizations, while Part II was based on examinations of 782 organizations. Approximately 10 percent of those examinations remain open. Part III of the project involves information gathered in the Part II audits. The March 1 report encompasses Parts I and II of the project; the report on Part III is anticipated at a later date.

The IRS summary of findings includes:

• Significant reporting issues: more than 30 percent of compliance check recipients amended their Forms 990 and 15 percent of the compliance check recipients were selected for examination.
• Major assessments: where problems are found, significant dollars are being assessed (25 exams have resulted in proposed excise tax assessments totalling more than $21 million against 40 disqualified persons or organization managers).
• Substantiated compensation amounts: while high compensation amounts were found in many cases, the IRS generally found them to be substantiated based on appropriate comparability data.
• Needed revisions: changes in the Form 990 are necessary to reduce errors in reporting and provide sufficient information to enable the service to identify compensation issues.

The IRS plans to continue its work in the executive compensation compliance area.