IRS Compliance Strategy: Excess Executive Compensation Paid by Tax-Exempt Organizations

Tax-exempt organizations that pay excess parachute payments or remuneration in excess of $1 million for a taxable year to “covered employees” need to be aware of a recently announced IRS compliance strategy.

On November 5, the IRS’s Tax Exempt & Government Entities Division (TE/GE) released its Fiscal Year 2021 program letter and new compliance webpage. According to the webpage, one area of TE/GE focus for the 2021 fiscal year is compliance with Internal Revenue Code section 4960.  Section 4960 imposes a 21 percent excise tax on “excess remuneration” (remuneration that exceeds $1 million for a taxable year) and “excess parachute payments” paid by an applicable tax-exempt organization to certain “covered employees” during a taxable year. Section 4960 applies to taxable years beginning after December 31, 2017.

According to TE/GE, ongoing review of filing data shows that a high volume of tax-exempt organizations paid compensation in excess of $1 million to at least one covered employee, but the organization did not report the section 4960 excise tax on the designated IRS Form 4720.

TE/GE’s fiscal year 2021 strategy for compliance with section 4960 will include compliance checks and examinations of Forms 4720. A compliance check is a review conducted by the IRS to determine whether the taxpayer (the applicable tax-exempt organization) is adhering to IRS reporting requirements. A compliance check is usually limited in scope and less burdensome than an audit or examination.

See our prior alert for a detailed discussion of excess remuneration and excess parachute payments under section 4960 and the related reporting requirements.