Not-for-Profit Notebook

Practical insight and analysis on the accounting, audit and tax issues impacting not-for-profit organizations.

Rebuttable Presumption and Compensation Packages

An Excess Benefit Transaction occurs when the consideration that a disqualified person receives exceeds the value that is warranted by the person’s employment with a tax-exempt organization.  In simple terms, the employee is getting paid more than their actions are worth.  This can cause serious complications as the IRS imposes an excise tax on these excess benefits. 

meeting-employee-packagesBoth the recipient of the benefit as well as organization managers may be liable for the excise tax.

Recognizing the ambiguity surrounding setting compensation packages for officers and key employees, the IRS has defined three requirements, which, when present, provide a tax-exempt organization a Rebuttable Presumption that a compensation package is reasonable:

  1.        The compensation package must be approved by the tax-exempt organization’s authorized body of independent persons;
  2.        That authorized body obtained and relied on comparability data prior to setting the compensation package; and,
  3.        The basis for determining the compensation package was adequately and timely documented.

What this means is that if these three requirements are present the IRS may only refute the reasonableness of a compensation package if it develops sufficient contrary evidence to rebut the probative value of the comparability data relied upon by the authorized body.  In other words, the burden of proof shifts from the tax-exempt organization establishing that the compensation package is reasonable to the IRS establishing that it is not reasonable.

Keep in mind though; the data relied on must be from other organizations that are comparable in terms of geographical location, size, revenues, total net assets, and other relevant factors.  Additionally, there is no specification for the frequency of these requirements, it stands to reason that the more recent the data the more relevant the determination.

While these requirements are not mandatory, without them the IRS will use a facts and circumstances approach to the reasonableness of a compensation package.  The burden, in this case, would be on the tax-exempt organization.

If you have questions concerning the Rebuttable Presumption of reasonableness or other questions related to your tax-exempt organization contact us so that we may assist you.