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.

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About Author: Christine M. Kong

Christine Kong is the go-to adviser for corporate and tax-exempt entities on retirement, employee-benefit and executive-compensation plans, particularly in the context of corporate transactions. Clients value her exceptional breadth and depth of knowledge. In addition to advising on employee benefits in corporate transactions, Chris assists employers with the design and implementation of new plans, plan mergers, and plan terminations. She also addresses operational compliance issues for employers and represents employers when their employee benefit plans are the subject of federal audit or investigation. View all posts by

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