Last week, the IRS released its final 37-page compensation report (“Report”), based on its five-year compliance review of 400 randomly selected colleges and universities. The Report reflects the IRS’ increasing willingness to scrutinize public charities, particularly their comparability data used to set executive compensation. Consequently, even though colleges and hospitals generally represent the largest and most complex of tax-exempt organizations under IRC Section 501(c)(3), the legal compliance concerns raised are worth a careful review by all tax-exempt public charities with employees.
IRC Section 4958 requires public charities to pay no more than reasonable compensation to their officers, directors, trustees, and key employees. In the event an organization provides unreasonable compensation, significant excise taxes can be imposed on the recipients of the compensation and potentially on the board members and others who approved it.
What is reasonable or unreasonable compensation? Section 4958 provides a “safe harbor” margin for organizations that follow a three-step process: