What All Tax Exempt Organizations Need to Know

Transcription

What All Tax Exempt
Organizations Need to Know
2014
Agenda
History of the Form 990: Origination and developments over time
Context: Disclosures at Public Companies: Convergence of
governance expectations within for-profit and not-for-profit entities
Recent IRS Enforcement and Penalties: IRS investigations
concerning compensation reporting practices
New (2008) 990 Disclosure: New compensation
disclosure rules; what has changed?
IRS Compliance Project Of Higher Education: What are they
asking?
2014 990 Submission Action Steps
What’s Next?
History of the Form 990
Context: Disclosures at Public Companies
Recent IRS Enforcement and Penalties
2014 990 Disclosure
IRS Compliance Project Of Higher Education
What’s Next?
What is the Form 990?
Public information returns filed by organizations that are exempt from federal taxation;
considered a skinny-down proxy filing containing financial information
•
The form has become a key research tool for philanthropic donors and other interested
parties
•
Eliminates the necessity of separately reporting annual audited financial statements
•
Incorporates some of the compensation disclosure elements of public company proxy
statements
Form 990 Access
IRS Form 990 is significantly more than just an annual tax filing because most of it is open to
public inspection and the required questions are designed to inform the public of how tax
exempt organizations operate
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IRS examiners
Potential students
Potential donors
Competitors
Media reporters
• The faculty and staff
that work at your
organization
• Local politicians
• Civic groups
The content of your annual IRS 990 filings are just as important as your:
• Web site
• Annual statements
• Media advertising
New (2008) 990 Disclosure
What’s Next?
Public companies are now approaching the sixth year of the new proxy disclosure rules
• Proxy statement disclosures require detailed discussion of compensation philosophy,
compensatory elements and decisions made regarding NEO compensation in the
CD&A
Proxy Statement compensation disclosure has spilled over into the Form 990
Increased stakeholder, attorneys general, government agencies and lawmakers focus on
executive compensation in the for-profit, publicly traded and not-for-profit, tax-exempt worlds
• Efforts by the IRS and SEC to develop rules that increase the flow of information to the
public while requiring organizations to be more transparent in their disclosures about
executive compensation
Context: Disclosures at Public Companies continued
New 990 compensation disclosure requirements are more in line with what is required of
public companies
• While not requiring the depth of discussion that the CD&A entails, the new 990 requires
that the Trustees understand the process by which compensation decisions are made
via a series of “yes” and “no” questions
Three guiding principles:
• Enhancing transparency (more disclosure and more detail)
• Promoting compliance (by collecting inspection screening information)
• Minimizing the burden on the filing organization by increasing reporting thresholds
What’s Next?
Hospitals Initiative Overview
As part of an initial investigation into 990 reporting practices, the IRS commenced an
Initiative Project in February 2004 (concluded in 2006)
An additional initiative commenced in 2009 and completed in 2011
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Over 2,000 compliance check letters
1,000 single issue examinations
The purposes of the project were to:
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Address the compensation of specific individuals or instances of questionable compensation
practices
Increase of awareness of tax issues as organizations set compensation in the future
Learn more about the practices organizations are following as they set compensation and report it to
the IRS and the public
IRS noted “significant reporting issues” existed
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Undocumented loans to insiders
Compensation spread across related organizations
Definition of “reasonable compensation” can be confusing
Deferred compensation reporting errors
Errors in executive benefits and perquisite disclosures
Recent IRS Enforcement and Penalties continued
Hospitals Initiative Overview
continued
In 2006, the IRS continued to investigate how executive compensation was set and paid at
targeted non-profit hospitals
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A “letter questionnaire” was sent to over 500 hospitals
The examination led to the collection of over $21,000,000 in additional revenue from
expanded excise tax assessments against 40 disqualified persons or insiders
The IRS actually provides a checklist to assist organizations establish procedures to help
avoid future IRS investigations
Recent IRS Enforcement and Penalties continued
Filing Late, Incomplete, Incorrect Information, or Failure to Facilitate
Public Inspection Requirements
For the Organization
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Organizations with annual gross receipts exceeding $1 million are subject to a penalty of $100 for
each day the failure continues (with a maximum penalty with respect to any one return of
$50,000)
For all other organizations, a penalty of $20 a day, not to exceed the smaller of $10,000 or 5% of
the gross receipts of the organization for the year
For Responsible Person(s)
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If the organization does not file a complete return or does not furnish correct information, the IRS
will send the organization a letter that includes a fixed time to fulfill these requirements. After that
period expires, the person failing to comply will be charged a penalty of $10 a day. The maximum
penalty on all persons for a failure with respect to any one return shall not exceed $5,000
Intermediate Sanctions Overview
Congress created the Intermediate Sanctions rules effective July 30, 1996
• Before Intermediate Sanctions rules, the IRS could only respond to excess benefit
transactions (EBTs) in two ways:
Revoke the organization’s tax-exempt status (rather extreme)
Ignore the problem
Intermediate Sanctions excise taxes under IRC Section 4958 are imposed on any
disqualified person who engages in an EBT with an IRC Section 501(c)(3) or 501(c)(4) taxexempt organization, and on certain organization managers who knowingly, willfully, and
without reasonable cause participate in such a transaction
A disqualified person is defined as any individual who was, at any time during the 5-year period that
ends on the date of the transaction, in a position to exercise substantial influence over the
organization’s affairs, including officers, directors, trustees, and certain other key employees
An EBT is one in which the value of an economic benefit provided by a covered exempt organization
to a disqualified person exceeds the value of the consideration received by the exempt organization
Intermediate Sanctions Overview continued
Non-compliance Excise Taxes
An initial excise tax of 25% on the amount of the excess benefit is assessed on the
disqualified person who improperly benefits from an excess benefit transaction
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The disqualified person must “correct” the transaction (generally, undo the transaction and restore
the excess benefit to the tax-exempt organization)
If the EBT is not timely corrected, an additional excise tax is imposed, equal to 200% of the amount
of the excess benefit
In addition, an excise tax of 10% of the amount of the excess benefit, up to $10,000 per
transaction, is imposed on any organizational managers (generally, officers, directors, or
trustees) of the organization who knowingly, willfully, and without reasonable cause
participate in an EBT
Rebuttable Presumption of Reasonableness
An important protection for disqualified persons and organization managers—a rebuttable
presumption that the amount of compensation paid is reasonable
Once invoked, the rebuttable presumption has the effect of shifting the burden to the IRS to
establish that a transaction is an unreasonable EBT
Rebuttable Presumption of Reasonableness continued
In order to obtain the benefit of the rebuttable presumption, the following three conditions
must be satisfied:
1. Independent Board or Committee Approval:
The arrangement must be approved in
advance by the Board of Trustees
(or a committee of independent
non-employees, thereof, that is composed
entirely of individuals who do not have a
conflict of interest or a material interest
with respect to the arrangement or
transaction under consideration)
Rebuttable Presumption of Reasonableness continued
2. Comparable Data Used: In approving the transaction, the Board of Trustees or Committee
must obtain and rely upon appropriate comparability data
The information must be sufficient to allow the Trustees or committee to determine
whether the transaction is reasonable
Relevant information may include for-profit or not-for-profit compensation surveys or
data compiled by independent firms reflecting the size, complexity, and location of the
organization
All of the elements of compensation should be considered as they relate to functionally
comparable positions
3. Documentation: The Board of Trustees or Committee must adequately document the basis
for its approval and be consistent with their formally stated policy of statistical compensation
pay-level targets and position comparison methodologies. (What, when, who, and follow up
actions, if any, in a formal and approved document)
An Illustrative Example - EBT
President’s compensation: Three Trustees serve on the Committee
that approves the compensation of the organization’s new president.
Each Trustee knows that the fair market value of the president’s services
does not exceed $350,000. Nevertheless, each Trustee votes to approve
setting the president’s compensation at $450,000.
Each Trustee may be subject to an excise tax of $10,000 (10% x $100,000 excess benefit)
as an organization manager ($30,000 in total)\
The president would be subject to an excise tax of $25,000 (25% x $100,000 excess benefit)
and would be required to repay the $100,000 excess benefit, plus interest, to the
organization in order to avoid the imposition of an additional tax of $200,000 (200% x
$100,000 excess benefit)
What’s Next?
Top Changes to the Revised IRS Form 990
1.
Expanded Disclosures for compensation to officers, directors and key employees
2.
Disclosure of compensation paid to officers, directors and key employees from
related organizations
3.
Definition of a related organization has been broadened
4.
New disclosure of requirement that the organization state whether or not it has a conflict
of interest policy
Summary of IRS Form 990 Changes
2008—Compensation of officers, directors, trustees, key
employees, highest compensated employees, and
independent contractors
The 2008 form attempts to serve two primary purposes in the compensation area:
1. Simplify and obtain more uniform basic compensation reporting from all organizations,
regardless of type or size, in Part VII of the core form
2. In some instances, obtain additional detailed information regarding a listed person’s
compensation and the organization’s compensation practices, particularly in those
cases where the organization has compensated one or more persons above certain
amounts
Summary of IRS Form 990 Changes continued
Part VII and Schedule J require calendar year Form W-2 and Form 1099-MISC reporting for
all Form 990 filers, regardless of their tax year
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The form no longer permits fiscal year organizations to elect to report an individual’s
compensation amounts in Part VII or Schedule J on a fiscal year basis
Fiscal year organizations are required to use fiscal year reporting, and to report
aggregate compensation in Part IX, Statement of Functional Expenses
Organizations are not required to reconcile compensation reported in Part VII for
individuals whose compensation is included in the aggregate compensation reported in
Part IX, Statement of Functional Expenses
The 2008 Form 990 Part VII
Section A consolidates the compensation portions of the 2007 Form 990 applicable to all
filing organizations, and Schedule A, Part I (for top 5 highly compensated employees HCEs), previously applicable only to charitable organizations
Section B of the 2008 form, which replaces the 2007 Schedule A, Parts II–A and II–B,
requires independent contractor reporting for all filing organizations (not just charities), but
limits it to the five highest paid, whether for professional or for other services
The threshold amount for reporting the top 5 HCEs and independent contractors for all
organizations has increased from $50,000 to $100,000
The 2008 Form 990 also contains a new Schedule J, Compensation Information, to report
detailed compensation information for those individuals listed in Part VII whose W-2 income
exceeds $150,000 or whose compensation with nontaxable fringe benefits and expense
reimbursements exceed $250,000 and all former officer, trustee, key employee, and HCE
listed on the core form
Part VII and Schedule J make compensation reporting more objective by requiring calendar
year reporting based on compensation reported on W-2 (Box 5) and 1099-MISC (Box 7)
filings
The instructions to Part VII and to Schedule J contain definitions of important terms that are
intended to provide greater clarity and promote uniform reporting of compensation on the
form
Schedule J includes a breakout of:
• Base Salary
• Deferred compensation
• Bonuses and incentive payments
• Select non-taxable benefits
• Other compensation
i.e., housing, education, life
i.e., Severance, income
insurance, gross-ups, etc.
earned in prior years paid
• Compensation reported in prior 990s
this year, qualified & nonqualified retirement
contributions, etc
Additional information will be required if anyone listed on the core form has
received:
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Severance or change of control payments
Supplemental non-qualified retirement plan
Additional information is also required if the organization has:
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Payments or bonuses that are contingent on revenues or net earnings
Initial contract exceptions to general compensation policies
Other non-fixed (event or performance-based) payments
These requirements are essentially inspired by the SEC proxy
statement compensation disclosure rules in that they require the
description of incentive plan details.
Persons required to be listed (current and former)
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All current officers, directors, and trustees who served at any time during the calendar
year ending with or within the organization’s tax year (no compensation thresholds here)
All current key employees earning over $150,000 from the organization and related
organizations
Has power to impact the operation of the overall organization, or
Manages a segment or activity representing over 10% of the organization
Current five HCEs (over $100,000 of reportable compensation from the organization
and related organizations)
All former officers or key employees, using a five year look-back period, who received
more than $100,000 of reportable compensation from the organization and related
organizations
All former directors or trustees, using a five-year look-back period, who received, in their
capacity as a former director or trustee, more than $10,000 of reportable compensation
from the organization and related organizations
A person who was a top 5 HCE in one of the five prior years, but only if the person was
no longer employed by the organization during the calendar year, received $100,000
reportable compensation, and would have been a top 5 HCE for the calendar year if still
an employee
A special 2008 transition rule applies for non-(c)(3) organizations in this context,
who were not required to report top 5 HCEs prior to 2008
Parts IV, VI, and Schedule J have a series of Yes/No Checkboxes that require narrative
explanations for “Yes” responses
Does the process for determining compensation include a review and approval by
independent persons, comparability data, and contemporaneously substantiation of the
deliberation and decision?
Was there a loan outstanding to or by a current or former officer, director, trustee, key
employee, highly compensated employee, or disqualified person as of the end of the
organization’s tax year?
Are there interlocking business or family relationships with other organizations?
Do you have a whistleblowers policy?
Do you have a conflict of interest policy?
Do you offer reimbursements for:
• First-class or charter travel?
• Spousal travel?
• Tax indemnification and gross-up payments?
• Discretionary spending accounts?
• Housing allowances?
• Business use of a personal residence?
• Health or social club dues?
• Maid, chauffeur, chef, etc. services?
IRS Compliance Project Of Higher
Education
What’s Next?
The IRS kicked-off their 2008 Higher Education Compliance initiative by sending approximately four
hundred questionnaires (Form 14018 September 2008) to a cross-section of small, mid-sized and large
private and public four-year colleges and universities this October
• The cover letter was three (3) pages and had an enclosed CD with an electronic version of the
questionnaire
• The instructions for the compliance questionnaire has nine (9) pages primarily of definitions and line
item instructions
• The Form 14018 Compliance Questionnaire itself has 94 enumerated questions on 33 pages
IRS Compliance Project Of Higher Education continued
IRS Form 14018 has four parts:
• Part 1 – Organization Information (22 questions/6 pages)
• Part 2 – Activities (10 questions/13 pages)
• Part 3 – Endowment Funds (27 questions/5 pages)
• Part 4 – Executive Compensation (35 questions/8 pages)
All executive compensation questions pertain to the six highest paid officers,
directors, trustees and/or key employees for the 2006 calendar year.
What’s Next?
Have a team of experts prepare a trial run using your latest information to develop a
preview of what your 2008 submission will look like
• Are there any surprises that you would like to address?
• Do you need to beef up your 990 preparation process?
• Can you reconcile your annual audit report to the Form 990 submission?
• Is the message you are sending consistent with your mission?
• Do you have a go-to person that can authoritatively answer Form 990 submission
questions?
Review your current process for setting compensation levels and identify areas that may
not meet IRS standards
• Do you have Board approval of compensation levels and policies?
• Is there decision-making by individuals that may have possible conflicts of interest?
• Do you use comparable data for setting pay levels?
Will data comparisons support the expanded 2008 levels of disclosed
compensation?
• Has a recent study been conducted to support a rebuttable presumption of
• reasonability?
• Is there adequate documentation of the overall compensation decision-making
• process?
2008 990 Submission Action Steps Continued
Review your current executive benefits and expense reimbursements
• Are your policies documented?
• Are your benefits and reimbursements consistent with your organization’s stated
mission?
Re-examine your Compensation Committee and how it operates
• Does it have a charter or is the committee in your By-Laws?
• Is it composed of independent Board members?
• Does it play an active role in developing pay levels and compensation policies?
• Is the process for reviewing and approving executive compensation documented?
• Are deliberations and decisions well documented?
Consider adopting written policies regarding:
• Conflicts of interest
• Whistleblowers
• Board and Committee document retention and destruction
What’s Next?
What’s Next?
Don’t panic—this new form will impact all not-for-profit colleges and universities
CEO and key officer pay will remain controversial
Boards will have a greater role in setting executive pay levels and policies
Executive benefits may be reduced in areas that send a message that conflicts with
an institution’s mission
The initial year of disclosure under this new format will be difficult and will improve in
subsequent years
Bonuses and performance pay will be more visible and will become more prevalent
as a result
CONTACT INFORMATION
Richard V. Smith
Managing Director
ExeComp Solutions LLC
7150 E. Camelback Rd
Scottsdale, AZ 85251
(480) 477-8051
[email protected]
David Chang
Managing Director
ExeComp Solutions LLC
51 JFK Parkway, First Floor West
Short Hills, NJ 07078
(973) 218-2692
[email protected]
45

What All Tax Exempt Organizations Need to Know

Transcription

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