Venable associate Yosef Ziffer was quoted in a May 14, 2013 Compliance Week article on the recently issued IRS report of its "Colleges and Universities Compliance Project," which highlights significant compliance issues in the nonprofit higher-education sector.
Ziffer advised that all large tax-exempt organizations – including hospitals and healthcare organizations – should carefully review the final report because it details areas that the IRS will likely target next. One area in which the IRS claimed inaccurate reporting by colleges was unrelated business income. Ziffer said if an organization thinks an activity is related to its tax-exempt purposes, it's important to document the basis for that determination based on all relevant facts and circumstances.
The IRS also informed that the organizations in the report provided inaccurate accounts of excess (unreasonable) compensation given to "disqualified" employees, which determines whether or not such persons will face excise taxes. Ziffer explained that "as long as organizations go through the process the IRS has laid out, then the compensation amounts they ultimately reward are presumed to be reasonable." If organizations establish the rebuttal presumption, which shifts the burden of proving unreasonable compensation onto the IRS, then that "doesn't mean the IRS ultimately couldn't come back and challenge a particular compensation arrangement, but the burden of proof is on the IRS to affirmatively show that the amounts paid were in excess of what would otherwise be reasonable," Ziffer said.
He concluded, saying "the issues the IRS identified in the final report are focused less on the actual amount of compensation being paid by those colleges and universities, and more on the process that colleges and universities engage in when setting compensation for their most highly compensated individuals."
Ziffer advised that all large tax-exempt organizations – including hospitals and healthcare organizations – should carefully review the final report because it details areas that the IRS will likely target next. One area in which the IRS claimed inaccurate reporting by colleges was unrelated business income. Ziffer said if an organization thinks an activity is related to its tax-exempt purposes, it's important to document the basis for that determination based on all relevant facts and circumstances.
The IRS also informed that the organizations in the report provided inaccurate accounts of excess (unreasonable) compensation given to "disqualified" employees, which determines whether or not such persons will face excise taxes. Ziffer explained that "as long as organizations go through the process the IRS has laid out, then the compensation amounts they ultimately reward are presumed to be reasonable." If organizations establish the rebuttal presumption, which shifts the burden of proving unreasonable compensation onto the IRS, then that "doesn't mean the IRS ultimately couldn't come back and challenge a particular compensation arrangement, but the burden of proof is on the IRS to affirmatively show that the amounts paid were in excess of what would otherwise be reasonable," Ziffer said.
He concluded, saying "the issues the IRS identified in the final report are focused less on the actual amount of compensation being paid by those colleges and universities, and more on the process that colleges and universities engage in when setting compensation for their most highly compensated individuals."