The headline for this article is not really “new” news. The Internal Revenue Service has been stepping up enforcement of its regulations governing nonprofits for several years now. Those who have been keeping up with the changes to the Form 990 annual reporting requirement know this to be true. What is new this time is that the IRS is focusing hard on two, key areas: 1) nonprofit pay practices and, 2) abusive activities by charities. Let’s take a look at each of these.
1) Nonprofit pay practices. The topic of nonprofit pay practices has long been an area of concern for the IRS. Federal regulations require that compensation paid to employees of tax-exempt organizations must be “reasonable”. Unfortunately, “reasonable” is a subjective evaluation of the situation as a whole, not necessarily an objective check list. Moreover, the IRS is the ultimate arbitor of what is considered reasonable. So what is new? The overall economic downturn, along with the focus on executive pay, has ramped up IRS scrutiny of the compensation nonprofits pay their executives.