Compensation is one of the hottest issues in the nonprofit sector. Donors rightly want to know how their hard-earned dollars are being managed. Nonprofit leaders are concerned about attracting and retaining skilled people necessary to meet their mission goals. And every so often we learn of an abuse or excess that attracts breathless media attention and political scrutiny, casting a shadow on all of us working in the sector. A newly released report from the IRS's Exempt Organizations Executive Compensation Compliance Project represents an important step toward helping nonprofits report compensation accurately.
The IRS launched this initiative in 2004. Part I of the project involved sending compliance check letters to 1,223 organizations. These letters were sent to a sample of nonprofits whose Forms 990 and 990-PF were missing information in certain categories, indicating that they warranted a follow-up. Part II consisted of 782 examinations, 179 of which resulted from responses to the compliance checks. The initiative looked not only at salaries and benefits but also at charities' reporting of excess benefit transactions (intermediate sanctions) and self-dealing by private foundations.
Why are these efforts so important? First, in light of the scrutiny over compensation, it is critical that nonprofits with paid staff report compensation and benefits accurately. Only by being completely transparent in these areas can we build trust with our supporters and members of the general public. It is then up to us to help these audiences understand why the compensation we pay is appropriate.
Unfortunately, the initiative revealed that "significant reporting issues exist." Many of the nonprofits contacted were confused about how to complete their 990s and found the instructions difficult to understand. Nearly a third had to amend their returns, and 15 percent were selected for further examination.
Although these findings are not based on a statistical sampling of charitable organizations, the IRS is taking the reporting problems seriously. The service is looking at ways to give nonprofits the technical guidance they need to fill out 990s accurately. The IRS is also considering redesigning the actual forms to make them less cumbersome to complete and rewriting instructions to make them less confusing.
The second reason that the project is noteworthy is its scope—to our knowledge, this is the first time the IRS has examined nonprofit compensation on this scale. GuideStar has always been a proponent of effective and efficient government, and we applaud the IRS for undertaking this initiative. These efforts will not only help identify the minority who wish to abuse the system but also enable the majority to follow the rules better by ensuring that they know just what those rules are.
At GuideStar, we firmly believe that the vast majority of people in the nonprofit sector are honest, generous, and dedicated. We recognize that a substantial number of our colleagues toil for very low—or no—wages. Organizations that require large budgets and complex operations to achieve their missions, however, need to offer appropriate compensation to attract and retain qualified staff. To build support and maintain trust, they must disclose their compensation practices and help the public understand why those practices are appropriate.
I hope you will see GuideStar as a resource to help both nonprofits and the public in this area. By providing a neutral platform of nonprofit data, we enable organizations to convey information about their programs and finances—including compensation—to the public. By making information on all nonprofits registered with the IRS available, we provide a benchmarking context for individual organizations' compensation data. By ensuring transparency, we provide reassurance to those who support nonprofits. Good luck with your efforts. Let us know how we can help you.
Bob Ottenhoff President and CEO
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