Form 990 - Excise Tax Exposure

There was a time when completing and filing IRS Form 990 (/Tax/0808TaxNews-Form-990.htm) - Annual Information Return of Organizations Exempt from Income Tax - was somewhat of a low-risk, innocuous process of providing information to the IRS and general public. Those days are long past as a result of much publicized examples of fiduciary failures by charity and foundation board members concerning abusive executive compensation and benefit packages resulting in the expected hue and cry for more accountability by Congress. This, in turn, has fueled greater scrutiny by the IRS and much more dire consequences of inaccurate reporting. 

As background, the Internal Revenue Code imposes an excise tax on certain "disqualified persons" who engage in an excess-benefit transaction with a tax-exempt organization. The tax is 25% (rising to 200% if not paid within a certain time period) of the excess benefit. In addition, an excise tax is also imposed on an organization manager who knowingly participated in such a transaction. 

In general, a disqualified person is anyone who was in a position to exercise substantial influence over the organization at any time during the five-year period ending on the transaction date. In connection with this, Form 990 requires information concerning compensation and other payments that are includable in the gross income of officers, directors, trustees and key employees. Payments include salaries, fees, bonuses and severance pay, all forms of qualified and non qualified deferred compensation, whether or not vested, and taxable and nontaxable fringe benefits. 

It has been said that the IRS will consider an economic benefit paid to a disqualified person as an excess benefit if it has not been treated as compensation in the Form 990. This automatic excess benefit applies even where the benefit is otherwise reasonable. In any event, it can be expected that the IRS will closely review agreements that provide economic benefits to disqualified persons. In addition to compensation, this would include loans and the purchase and sale of goods. 

Finally, IRS Form 990 includes a question as to whether the organization engaged in an excess-benefit transaction during the year or became aware of such a transaction in a prior year. It can be expected that the IRS will closely examine the response to this question and aggressively pursue organizations that fail to answer the question or respond "not applicable". 

The stakes can be high for both the disqualified person and the organization unless considerable care and diligence is exercised in preparing the 990.

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