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Trigger Question on the Rebuttable Presumption for Executive Compensation

Not-for-Profit|Tax

By Gene Logan

The Tax-Exempt and Government Entities section of the Internal Revenue Service (IRS) has indicated that it will be using data-driven decision-making to determine case selection for audits. Basically, the IRS will analyze trigger questions embedded in the Form 990.  One potential trigger question involves the Rebuttable Presumption for Executive Compensation.

Form 990, Part VI, line 15 asks how an organization determines compensation for its various executives.  These questions are based on the rules establishing the rebuttable presumption as outlined in Regulation §53.4958-6.  If these rules are followed, a compensation arrangement is presumed to be at fair market value.  The burden of proof that a compensation arrangement isn’t at fair market value is then moved from the taxpayer to the IRS.  For an organization with highly compensated executives, placing the burden of proof on the IRS is very important.

The Regulation has three conditions that must be followed, summarized as follows –

  1. The compensation arrangement or the terms of the property transfer are approved in advance by an authorized body of the applicable tax-exempt organization composed entirely of individuals who do not have a conflict of interest with respect to the compensation arrangement or property transfer.
  2. The authorized body obtained and relied upon appropriate data as to comparability prior to making its determination.
  3. The authorized body adequately documented the basis for its determination concurrently with making that determination.

Form 990, Schedule J requires additional information from organizations that pay reportable compensation greater than $150,000.  One of the questions involves how an organization established the compensation of its CEO/Executive Director.  These include whether the compensation was established by a compensation committee; whether Forms 990 of other comparable organizations were used and whether compensation was approval by the board or compensation committee.  These questions and responses tie back to the Regulation establishing the Rebuttable Presumption.

If an organization indicates that it follows the rules on Form 990, Part VI, line 15, but it does not indicate that it is adhering to these requirements on Schedule J, it could trigger an inquiry (or more) from the IRS.  If your organization needs assistance in establishing the Rebuttable Presumption for Executive Compensation, please contact a tax professional in the Not-For-Profit group at Schneider Downs.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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