Guidelines for the IRS’s Rebuttable Presumption Safe Harbor

It is common knowledge that nonprofit organizations provide an extensive amount of transparency to the public. One area that has seen more scrutiny is executive compensation.

Since the IRS’s rebuttable presumption safe harbor was instituted, executive compensation has been increasing, said Mark A. Pacella, Chief Deputy Attorney General with the Pennsylvania Attorney General's Office. IRS officials have said a range of salaries is supposed to be considered; instead, nonprofit organizations are moving to the top of the wage scale to pay salaries.

According to Lois G. Lerner, Director of IRS Exempt Organizations Division, “information-sharing between the IRS and state attorney general’s is ramping up”. Over the past four years, the IRS has received 600 referrals from state charity oversight official organizations, in which 90% of those referrals led to examinations.

Nonprofit organizations can comply with the reasonableness of executive compensation by following the three requirements from the IRS’s “Rebuttable Presumption of Reasonableness”; or in simple terms, consider implementing the following practices and procedures:

1. Establish an authorized body (i.e. compensation committee) comprised of individuals that do not have a conflict of interest
2. Have the authorized body:
   1. Create a compensation policy
   2. Assess all areas of appropriate comparable data, which includes:
      1. Data from similar organizations in size, sector and region
      2. Determine a range for executive compensation (in most cases, the median is deemed reasonable rather than the top-tier of the range)
      3. Adequately and timely document the basis for its determination
   3. Approve Executive compensation

If you feel your organization might be out of compliance with executive compensation or would like to learn more about implementing these practices into your organization, please contact Brandon Miller at (216) 378-7224 or millerb@hwco.com.