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CharityWatch Calls for Full Disclosure of Charity Executive Compensation

    Aug 1, 2011

August 1, 2011

Attn: Internal Revenue Service
Re: Announcement 2011-36, Thresholds for reporting compensation to key employees, highest compensated employees, independent contractors, and former officers, directors, and key employees.
From: Daniel Borochoff, President of the American Institute of Philanthropy

The American Institute of Philanthropy (AIP) at www.charitywatch.org is a nonprofit charity watchdog dedicated to helping donors make more informed giving decisions. The IRS’s 2008 redesigned Form 990 and subsequent revisions have been very helpful in providing watchdogs like AIP and the broader public with more detailed information on charities’ financial activities. We appreciate the opportunity to provide the IRS with input on a very important disclosure that we believe is central to maintaining donors’ confidence and trust. Current IRS rules allow charities to hide from the public certain payments made to a nonprofit’s individual officers, directors, trustees, and key employees (ODTKEs). We believe this is wrong on several fronts and hope that the IRS will close this accountability gap in its revisions to the current tax Form 990.

Under current Form 990 reporting rules, charities are required to break out compensation paid to each individual officer, director, trustee, or key employee. Schedule J provides for additional compensation disclosures of highly paid ODTKEs. On schedule L charities must report other transactions between the charity and its ODTKEs, including loans to or from the organization, grants to close family members of ODTKEs, as well as excess benefit transactions between the charity and its ODTKEs. Such disclosures of compensation and related party transactions are vitally important to keeping charities and their executives honest by deterring those who have significant control over a nonprofit from using it for personal benefit. Those who might organize a charity primarily for personal gain are also deterred by these reporting requirements which highlight for public scrutiny the transactions between a charity and the people who control it.

Unfortunately, IRS reporting rules still allow for a major lapse in transparency with respect to compensation of a charity’s ODTKEs. Under current rules, ODTKEs can receive certain payments from their charity without such payments being reported as compensation to the individuals who received them. For example, the president of a charity might receive $300,000 in salary and retirement benefits from his organization annually. Such compensation is required to be broken out in Part VII of the Form 990, and reported in even greater detail on Schedule J. If this charity executive, rather than receiving compensation directly from the charity, instead sets up a for-profit company and receives this same amount of compensation in the form of consulting payments to his company, such compensation is not uniformly required to be broken out as salary or benefits to this individual officer on the charity’s tax form. Instead, the charity is allowed to hide such payments to individual ODTKEs by reporting them as lump sums paid to the consulting company. Allowing nondisclosure of such compensation to individuals simply because payments were made indirectly is at best arbitrary, and at worst deprives the public of the information it needs to determine whether the total compensation paid to any individual ODTKE by their charity is reasonable for the services provided.

Lapses in compensation reporting that amount to loopholes are not helpful for maintaining donors’ trust in the sector. Such lapses are also highly unfair to those charities and charity executives who are transparent about compensation in their financial reporting to the public. It is not fair that the president of one charity can brag about taking zero salary from his nonprofit while receiving large payments through his consulting or fundraising company, when the president of another charity has his feet held to the fire by donors for honestly reporting his individual salary on the charity’s tax form. Under such a system, otherwise honest charities may feel pressured to hide compensation from the public so they are not unfairly compared to other charities that may, in fact, pay higher compensation to their executives but are not required to break it out. The IRS should level the playing field by requiring charities to report total compensation paid to individual ODTKEs, regardless of whether such compensation is paid by the charity directly as salary and benefits, or indirectly through outside companies.

Donors are at times too focused on what they perceive as the high levels of compensation received by some charity executives. We at AIP try to put charity executives’ salaries in perspective for donors who may not understand that nonprofits compete with the private sector for qualified employees and must offer reasonable compensation relative to the skills, education, and level of experience required for a specific position. Such scrutiny from donors motivates some charity executives to come up with creative ways to hide their compensation. While we understand that it is not always comfortable or easy to justify to donors why a high level of compensation may be appropriate for a specific ODTKE, this should not preclude the public from knowing the amount of tax subsidized dollars used to pay an individual charity executive.

An improved rule requiring charities to disclose all compensation paid to any individual ODTKE should require little additional effort by well-run organizations that already track personnel costs internally. Any charity with good governance practices is concerned about giving the appearance of a conflict of interest when it hires a company that employs or is owned by one of its ODTKEs, and therefore regularly monitors such transactions. The governance and management practices of charities that do not keep detailed records or regularly monitor personnel costs will be improved by an IRS disclosure rule that requires them to do so.

Charities already keep detailed records of employee compensation to meet reporting requirements for federal and state employment tax, workers’ compensation and other insurance, and Form 990 disclosures. They also keep track of payments made to independent contractors, consulting companies, professional fundraisers and others for Forms 1099 and 990 reporting purposes, as well as to comply with state level solicitation rules. The recordkeeping and reporting burden a charity might incur to provide the public with a breakout of a charity executive’s total compensation is minimal relative to the benefit that comes from giving donors and taxpayers the information they need to hold charities accountable for their dollars.

We thank you again for giving AIP the opportunity to advocate for the donating public by providing comment on this issue. We hope the IRS will seriously consider adding our suggested reporting requirement related to charities’ ODTKE compensation. Doing so would be a significant accountability improvement to the Form 990.