IRS Focus in 2021: Excise Tax on Excess Tax-Exempt Organization Executive Compensation

Home / Nonprofit / IRS Focus in 2021: Excise Tax on Excess Tax-Exempt Organization Executive Compensation

The IRS’s Tax Exempt & Government Entities Division (TE/GE) recently issued its annual program letter outlining its areas of focus for 2021. The agency also released a new compliance website detailing the TE/GE Division’s compliance strategies, which includes the following:

Exempt Organizations: Excise Tax on Excess Compensation.

This strategy is to review the impact of the new Internal Revenue Code Section 4960 excise tax on excess compensation. IRC Section 4960 imposes a 21% excise tax on tax-exempt organizations that pay over $1 million in compensation to any “covered employee.” Ongoing review of filing data shows there continues to be a high volume of exempt organizations that paid compensation of over $1 million to at least one “covered employee” but did not report IRC Section 4960 excise tax on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. The approved workstreams for this strategy are compliance checks and examinations of Form 4720.

An IRS compliance check is a review process the IRS uses to determine whether an organization is in compliance with IRS reporting requirements. It is typically limited in scope and less burdensome than an examination or audit.

IRS Guidance on Calculating the Excise Tax

IRS Notice 2019-09 states that the following steps should be taken to calculate how much excise tax, if any, is owed on a parachute payment:

  • Is the covered employee entitled to compensation due to an involuntary termination that is not subject to any exclusions? If yes, then continue.
  • Determine the total aggregate present value of the expected contingent payments. Watch for pertinent special valuation rules that affect payment or the vesting of a right to payment.
  • Calculate the covered employee’s base amount of compensation.
  • Are the contingent payments considered parachute payments?
  • If so, then calculate the amount of excess parachute payments, if any.
  • Finally, use Code Section 4960(a)(2) to calculate the amount of excise tax owed.

Other factors affect this calculation, including whether a separation of employment is voluntary or involuntary. Remuneration paid for medical and veterinary services should not be included when calculating the five highest-paid individuals.

The Church Law Center of California advises churches and other nonprofits on how to protect themselves from risk while furthering their mission. Call us today at (949) 892-1221 or reach out to us through our contact page.

Related Posts
Call Now Button California Franchise Tax Board Updates Affecting Nonprofits in 2021