Our friends at Charitygoverance.com have taken their own look at the IRS’ interim report that we wrote about recently and we thought we’d share it with you.  Among other things they note that despite concern expressed by Congress (and the IRS – see our posts on this), few institutions used for-profits for comparison.

Foundations should take note of the April 24, 2010, “Prepared Remarks of Commissioner of Internal Revenue Douglas H. Shulman at the Council on Foundations 2010 Annual Conference, Denver, CO”

Lawrence Associates summarized and excerpted some of the key and potential implications of these remarks:

IRS Focus on High Wealth Individuals

– The IRS is innovating .  “A good example is our global wealth unit which we launched last year, which will look at the entire web of economic entities controlled by a high wealth individual.  In the past, we looked at each legal entity separately.  Now we will look at an individual’s tax return, business holdings, trusts, related charitable entities, foreign holdings and other tax related activities as an integrated whole to look for patterns of non-compliance.”

Oversight and Criteria for Grant-making and Grantees

 – “one of the key criteria for grant-making in most foundations is a strong, stable management team and board of directors for the organization receiving a grant… Before your foundation makes a grant, you want to make sure that the organization receiving the grant is:

     o Properly run and a good steward of its assets
     o Has good internal controls
     o Has sound leadership
     o Is skillfully managed to give you confidence it can and will execute in its mission and serve a public good

Focus on Good Governance and Internal Controls

– “The Council’s ethical principals…mirror the IRS’ core values of honesty and integrity …respect…continuous improvement…inclusion…openness and collaboration…and accountability.”
–  “…good governance is essential to public trust and accountability, and critical to the success of all organizations and institutions, including governments, non-profits and for-profits.”
–  “We want well-run institutions that deliver on their on their missions – exempt purpose – tax parlance.  We want appropriate controls in place to ensure clean books and records and adherence with legal requirements…We both benefit from another set of eyes looking at similar issues.”

Potentially Aligning the Form 990-PF with the Form 990?

– ” We will continue to focus on….trust, accountability, and transparency as our strategy evolves.  The new Form 990 is perhaps the best example of our recent work to promote public trust and accountability in the non-profit area.”

Continued Areas of IRS Focus and Articulation of Good Governance

–  “Congress…allowed for greater control by the original donor to a private foundation in exchange for the application of a fairly precise set of restrictions on behavior.  To some extent, these restrictions are a specific articulation of some good governance practices; including taxes on:
     o acts of self-dealing involving private foundation assets;
     o private foundation expenditures that are not for charitable purposes; and
     o excessive business holdings or risky investments that jeopardize the financial well-being of the foundation”.

On May 7, 2010, the IRS released the “Interim Report on Nonprofit Colleges and Universities Compliance Project.” Although the reported compensation numbers are very generic to be applied to specific institutions, other aspects of the report are quite interesting. We’ve summarized and excerpted the following:

 In large organizations, the highest paid employee (other than officers, directors, trustees or key employees – ODTKEs) was most often a sports coach (43% of organizations).

Very few colleges and universities reported that their coaches are not employees of the organization. The percentage of employees who received NCAA Athletic Income increased with organization size.

Only 55% of small, 71% of medium and 63% of large private colleges and universities reported using the Rebuttable Presumption Procedure (Intermediate Sanctions safe harbor) for any of the six highest paid. The others are not using the process.

The use of comparability data to establish compensation was present less frequently than the other rebuttable presumption factors (contemporaneous documentation and approval by an independent governing body)

We viewed perquisites and benefits reported for at least one of the highest six as typical for the sector

Detail on retirement showed relatively low levels of supplemental executive retirement, e.g. IRC 457(f) organization contributions were reported by 8% – 15% of organizations.

BNA Daily Tax Report quotes Lawrence Associates in “IRS Audits Harvard, Other Universities in Probe of Exempt Purpose Rules” by Diane Freda, March 26, 2010.  In the article Lindalee Lawrence, President of Lawrence Associates, commented on the implications of audits for executive compensation. The article notes that according to former IRS Exempt Organizations Director Marcus Owens, now an attorney with Caplin & Drysdale, a review of compensation has now become a staple of every audit of an exempt organization.