The Executive Compensation Compliance Project (aka "The Project") was initiated in response to a budgetary reorganization that came about in 2004 in which two new offices (the Exempt Organizations Compliance Unit and the Data Analysis Unit) of the service were created.[2]  In this, their maiden voyage, the offices sought to accomplish threefold: (1) to "increase awareness of compensation as a compliance issue [and] establish [an] enforcement presence," (2) to "observe the practices and procedures exempt organizations use to determine compensation of their officers, directors, trustees, key employees, and related persons" and (3) to "assess and enhance tax law reporting and compliance with respect to compensation practices . . .."[3]  By performing an informal audit of existing practices within the tax exempt world of compensation, the offices hoped to both strike the fear of an actual crackdown into the hearts of the organizations, as well as assess the existing law as a monitoring mechanism.

In order to achieve these ends, a bi-part plan of attack was employed.  In Part I, letters were sent to four categories of public charities and one category of private foundations whose tax filings from the prior year had been deemed routinely suspect, generally because of some compensatory omission.[4]  In Part II, a particular aspect of compensation was addressed -- that of improper compensation through an "excess benefit transaction" to "disqualified persons" within the meaning of section 4958 of the Code.[5]  Under this section, any party deemed to be in a position to wield "substantial influence" over the affairs of a tax exempt organization is limited in the benefit that person can personally receive from the organization in the form of compensation -- compensation outside of the limited allowable sphere is deemed an "excess benefit," and an excise tax is placed on those disbursed funds or other value.[6]  Because "excess benefit" is a particular area of abuse where there is oftentimes incestuous overlap between the titles of benefactor, director and executive, this study felt it important to scrutinize the compensation received by "disqualified persons" in three categories of public charities, and one category of private foundations.

The findings of the study were somewhat unsurprising.  Part I revealed much "confusion" in the way that executive compensation was intended to be reported -- the letters sent to the various organizations asking them for additional information regarding their omissions were met primarily with "clarifying information" not requiring of a re-file, but also many instances of refilings.[7]  Part II resulted in the proposed collection of some $20 million in excise taxes for various compensation and benefit violations.[8]  While the results suggested that private foundations perhaps engaged in more excess benefit transactions/excessive compensation than did the public charities, these results were skewed by the facts that (1) the public charities had some difficulty understanding some questions that resulted in false positives for excess benefit transactions, and (2) the questionnaires created enough of a notice effect that a great deal of the excess benefit transactions supposedly being engaged in were corrected before a formal audit.[9]

III. Conclusion

What does this study mean, going forward, with regard to what the IRS can do to keep better tabs on the compensation that tax exempt organizations are doling out?  "For better or for worse, the tax form is the nonprofit disclosure instrument."[10]  Dan Prives, a blogger and former finance director at World Relief questions the way that very large nonprofit organizations -- in this instance, Yale University -- report their specific expenses and securities transactions.[11]  In a telephone interview with the New York Times, Prives is quoted as having said that he was surprised "because usually A-list nonprofits like Yale are pretty accurate in their reporting . . . It threw a whole monkeywrench into my thinking about what's being achieved by publishing these [tax] forms.  You can have errors in plain sight and nobody's picking it up."[12]  While this study may have dug up a few instances of underreporting and overcompensation, the fact remains that even an intensive three-year study like this hardly makes a dent in the tax exempt world.  Only 600 organizations total were targeted by this study, compared to the more than 1.5 million organizations that make up 10% of this country's GDP -- and these numbers are ever-growing.[13]  It is possible that, at least insofar as public charities are concerned, there is enough of a donation market (that is, competition for donations among public charities) that public charities do have incentives apart from the threat of audit to maintain efficient, up-and-up administrations.  However, private foundations will likely forever be an appealing option for wealthy individuals looking for a tax shelter cloaked in goodwill.  This author doesn't have a solution to the problem that studies like these merely confirm -- let's just hope that these societal costs are outweighed by whatever societal benefit the world of tax exempt organizations is meant to impart.

[1] Report on Exempt Organizations Executive Compensation Compliance Project--Parts I and II (Internal Revenue Service March 2007), available at www.irs.gov/pub/irs-tege/exec._comp._final.pdf.

[2] Id. at 1.

[3] Id. at 2.

[4] Id. at 3-4; see 26 U.S.C.A § 4958 (West 2007).

[5] Supra note 1 at 4.

[6] See 26 U.S.C.A. § 4958 (West 2007); see also supra note 1 at 2.

[7] Supra note 1 at 5-9.

[8] Id.

[9] Id.

[10] Stephanie Strom, I.R.S. Finds Errors in Tax Reports of Nonprofits, N.Y. Times, March 1, 2007.

[11] Id.

[12] Id.

[13] Stephen C. Gara, Khondkar E. Karim & Robert E. Pinsker, The Benefits of XML Implementation for Tax Filing and Compliance, The CPA Journal, December 2005, available at www.nysscpa.org/printversions/cpaj/2005/1205/p66.htm.