Healthcare Industry

Tax Update 2014

Rules, Regulations, Changes, Best Practices and Recommendations

2

Introduction

Scott J. Mariani, JD, Tax Partner

Practice Leader

Healthcare Services Group

smariani@withum.com

465 South Street, Suite 200

Morristown, NJ 07960

(973) 532-8835

withum.com

3

Agenda

IRS Update

IRS Exempt Organizations Update

Affordable Care Act

Schedule H and Community Benefit

Foreign Reporting

Executive Compensation

4

IRS Update

Part One

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For a historical perspective, in 1986, the top 1% of earners

reported 11% of all income and paid 26% of the income

taxes; the lower-earning 50% made 17% of the income and

paid 6% of the nation's individual income tax bill.

IRS Update

Breakdown of Income and Taxes Paid by Category

Income Category 2011 AGI % of All Income % of Income Taxes Paid

Top 1% Over $388,905 18.7% 35.1%

Top 5% Over $167, 728 33.9% 56.5%

Top 10% Over $120,136 45.4% 68.3%

Top 25% Over $70,492 67.8% 85.6%

Top 50% Over $34,823 88.5% 97.1%

Bottom 50% Under $34,823 11.5% 2.9%

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IRS tea party/patriot issue. April 2013

Resignation of Acting IRS Commissioner Steven Miller.

April 2013

Government shutdown. October 2013

IRS budget decrease of $526 million, or 4.4% compared to the previous year’s enacted level. January 2014

“Gross mismanagement” by Office of Chief Counsel staff in NY and LI is alleged.

March 2014

Problems at the IRS

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Are subject to FICA.

SUPREME COURT CASE

Severance Payments

United States v. Quality Stores, Inc.

U.S., No. 12-1408, 3/25/14.

Supreme Court decision; 8-0; March 25, 2014.

Medical resident FICA issue.

8

IRC Section 125 plans a/k/a cafeteria plans.

IRS Notice 2013-71.

Further Modification of Use-or-Lose Rule.

1. Expenses incurred by 12/31; or

2. Expenses incurred during the period of up to 2

months and 15 days immediately following the end

of the plan year; or

3. Carryover of $500 to the immediately following

plan year.

Flexible Spending Accounts

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Accounts Payable – New Form W-9

New Form W-9; Request for Taxpayer Identification Number and Certification.

Disregarded entity; shown on line 2 not on line 1.

Limited liability company.

Exempt payee code (if any).

Exemption from FATCA reporting code (if any).

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Accounts Payable – New Form W-9

10

11

Senate Finance Committee report “Cost Recovery and

Accounting Discussion Draft”; released November 21, 2013.

AICPA Coalition Letter; January 17, 2014.

Cash Versus Accrual

Taxable income is recognized when received (cash basis) versus when services are rendered (accrual basis).

Annual gross receipts threshold of $10 million.

Personal service corporations and professional firms; e.g. physician practices.

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Revenue Ruling 2013-17; effective September 16th.

Same-sex couples legally married in a jurisdiction that recognizes their marriage are now recognized as married for federal tax purposes; regardless of jurisdiction in

which they reside.

Terms included in the IRC that refer to marital status will include an individual married to a

person of the same sex, if the couple is lawfully married under state law and such a marriage is

between individuals of the same sex.

Defense of Marriage Act (“DOMA”)

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Income tax.

Estate and gift taxes.

Federal tax provisions:

• Filing status.

• Exemptions.

• Standard deduction.

• Employee benefits.

• IRA contributions.

• Earned income tax credit.

• Child tax credit.

DOMA Applicability

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Additional procedures and guidance forthcoming:

• Refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits.

• Cafeteria plans.

• Qualified retirement plans and other tax-favored arrangements.

FAQs on IRS website.

IRS Publication #555.

DOMA - Additional Guidance

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02 Review your existing IRC Section 125 plan and

consider revising the plan.

01 Review your current arrangements with respect to

severance, including written agreements, where applicable.

Recommendations

Do you have a Form W-9 for every vendor?

Review your “non-1099 required” vendors.

Consider a process to obtain an updated Form W-9 for all

vendors.

Consider voluntary disclosure options if issues are

identified.

03 Review your accounts payable function.

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IRS Exempt Organizations Update

Part Two

16

17

IRS EO Reorganization April 2013

Tea Party/Patriot

Issue and

Applications for

Tax-Exemption.

IRC Section

501(c)(4) social

welfare

organization.

IRC Section

501(c)(27)

political

organization.

Lois Lerner, IRS Exempt Organizations (“EO”) Director retired in April of 2013.

Tamera Ripperda, named IRS EO Director, December 2013. From

Large Business and International Division.

INVESTIGATION

STILL

ONGOING

NEW

DIRECTOR

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The IRS Exempt Organizations

group will not publish a 2013

Annual Report & 2014 Work Plan

this year.

IRS EO Group

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IRS Forms 1023 and 1024

Significant period of time from the date of taxpayer

filing, IRS receipt, review and issuance of IRS

determination letter in most instances.

Applications for Tax-Exemption.

IRS TE/GE expects a “significant” decrease in the IRS’

backlog of 80,000 applications by the end of 2014;

announced in February of 2014.

Streamlined IRC Section 501(c)(3) exemption process

starting in the summer of 2014; Form 1023-EZ; Federal

Register 3/31/2014.

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Instructions to the Form 990; Appendix D: Public

Inspection of Returns.

Application for Recognition of Exemption and three most

recently filed Forms 990 and 990-T.

Form 990 Public Inspection

Amended

Forms 990

and 990-T.

3 years from the date of filing.

Provide copy of the amended

Form 990 to each voting

member of the governing

body prior to filing?

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02

Use Form 4506-A

Request for Public Inspection or Copy of

Exempt or Political Organization IRS Form

Form 990 Public Inspection

• Request made in person. Unusual

Circumstances.

• Request made in writing.

01

Guidestar.org

03 Through the

organization

Available Via:

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Form 13909

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Form 13909

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Pension Protection Act of 2006; failure to file Form 990, 990-

EZ or 990-N for three consecutive years results in automatic

revocation of tax-exempt status.

Notice 2011-43 and Notice 2011-44.

Revenue Procedure 2014-11; Streamlined Retroactive

Reinstatement Process.

Reasonable cause depends on whether the new Form

1023/1024 is filed not later than 15 months after the later of the

date of IRS revocation letter or the date on which the IRS

posted the entity’s name on the Revocation List.

Revocation of Tax-Exempt Status

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The bill would strike

“professional football

leagues” from the

Internal Revenue Code,

a phrase that has been

in place since 1966.

Revocation of Tax-Exempt Status

Properly Reducing

Overexemptions for

Sports Act (H.R. 3965),

which would prevent

professional sports

organizations with

annual revenues of more

than $10 million from

claiming an IRC Section

501(c)(6) tax exemption;

introduced January 29,

2014.

WOULD BE

AFFECTED

NFL earns about

$9B in revenue

annually.

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Charitable contributions limitation.

Elimination of Rebuttable Presumption of Reasonableness.

Excise Tax on Excess Tax-Exempt Organization Executive Compensation.

Unrelated Business Income Tax.

The Tax Reform Act of 2014 - Proposed

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DESIGNATE

• A contact person to handle all Form 990 requests.

MAINTAIN

• Both a “taxpayer” copy and a “public disclosure” copy of the Forms 990 for each of your tax-exempt organizations annually.

ADOPT

• A written Form 990 public disclosure policy.

Recommendations

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Affordable Care Act

Part Three

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Tax Provisions and Revenue Generators

2013 2014 2018

Additional

Medicare Tax.

Net Investment

Income Tax.

Medical Device

Excise Tax.

Patient-

Centered

Outcomes

Research Fee.

Transitional

Reinsurance

Fee.

Health

Insurance

Provider Fee.

Cadillac Tax.

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Large employers that DO NOT offer coverage to at

least 95% of full-time employees must:

pay a penalty if any full-time employee

receives premium assistance through a

marketplace.

Penalty is equal to:

$2,000

x

Total Full-Time Employees in excess of 30.

Employer Shared Responsibility

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Large employers that DO offer coverage to

at least 95% of full-time employees that:

IS NOT affordable, or

DOES NOT meet minimum value

requirements must pay a penalty.

Penalty is equal to:

lesser of $3,000 for each full-time employee receiving premium assistance or cost

sharing reduction through a marketplace or $2,000 per full-time employee in

excess of 30.

Employer Shared Responsibility

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Employer Shared Responsibility

If the employee share of the premium is in excess of 9.5% of their household

income, coverage is not “affordable”.

If health plan doesn’t cover at least 60% of total allowed costs of

benefits provided under the plan, it is

not providing “minimum value”.

PREMIUM IN EXCESS OF

9.5% OF HOUSEHOLD INCOME

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Employer Shared Responsibility

Full-time employee

Averages, for a calendar month, at least 30 hours of

service per week or has worked at least 130 hours of service

during the month.

Full-time equivalent

Total number of hours of service for

all non full-time employees for the month divided by

120.

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Employer Penalties

For those with 50+ Full-Time

Do you offer coverage?

Does the plan provide minimum value? Plan pays

60% of claims.

Is the coverage affordable?

Yes

Yes

Yes

No $2,000 per FT (minus first 30)

$3,000 per FT Receiving tax credit/subsidy

No

No

Employer “Safe Harbor” Coverage would be considered “affordable” if the premium contribution for single coverage does not

exceed 9.5% of an employee’s W-2, box 1 wages.

$3,000 per FT Receiving tax credit/subsidy

No Penalty

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CONTROLLED GROUPS

Employer Shared Responsibility

Large employer status is determined on basis of entire controlled group.

Penalties are determined on a separate basis.

Only one 30 employee exclusion allowed per controlled group.

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Final regulations 2/10/2014.

Transitional relief for:

• Mid-sized employers (50-99 FTEs) have an additional one year to January 1, 2016 to comply.

• Large employers (100 or more FTEs) only required to offer to 70% of full-time employees.

What Has Been Delayed

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Generally incorporate reporting requirements

outlined in the proposed rules.

Provide limited options for streamlined reporting of

employer offer of coverage in specific circumstances.

Generally requires employers and insurers to collect Social Security numbers for primary insured, covered spouses and dependents to report minimum

essential coverage.

Highlights of Final Regulations

Sections 6055 and 6056

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Information to be reported under IRC Section 6055:

• The name and tax payer identification number (TIN) of each individual enrolled;

• The name and address of the primary insured who submits the application for coverage;

• Months during which the individual is enrolled in minimum essential coverage.

For coverage offered in 2015, information returns must be provided to individuals by February 1, 2016, and to the IRS by March 31, 2016.

Reporting via Form 1095-C employee statement and Form 1094-C employer transmittal (6055/6056 combined).

Section 6055 General Rules

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• Birth date of dependent may be reported if employer made a “reasonable effort” to obtain the TIN.

• Three efforts must be made to obtain the TIN to avoid filing.

Taxpayer Identification Numbers (TINs): Must report TIN of the primary insured and each individual covered under the policy and the months that the individuals were covered.

Penalties.

• Employee consent and other requirements apply.

Electronic filing permitted.

• Third party may be designated to file on behalf of the employer.

Reports filed by employing entity for self-funded plans.

Complexities of Section 6055 Reporting

40

General reporting method:

• Number of full-time employees, by month;

• For each full-time employee, months when coverage was

available for each full-time employee, the employee’s share of

the lowest-cost monthly premium for self-only coverage;

• Additional information, some by indicator code.

For coverage offered in 2015, information returns must be

provided to individuals by February 1, 2016, and to the

IRS by March 31, 2016.

Reporting via Form 1095-C employee statement and

Form1094-C employer transmittal (6055/6056 combined).

Section 6056 General Rules

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Requires you and each member of

your family to either:

Individual Shared Responsibility O

NE

Have minimum essential coverage, or

TW

O

Have an exemption from the responsibility to have minimum essential coverage, or

TH

RE

E

Make a shared responsibility payment when you file your 2014 Federal income tax return in 2015.

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Minimum Essential Coverage

Health insurance coverage provided by your employer,

Health insurance purchased through the Health Insurance Marketplace in the area where you live, where you may qualify for financial assistance,

Coverage provided under a government-sponsored program for which you are eligible (including Medicare, Medicaid, and health care programs for veterans),

Health insurance purchased directly from an insurance company, and

Other health insurance coverage that is recognized by the Department of Health & Human Services as minimum essential coverage.

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Has no affordable coverage options because the minimum amount you must pay for the

annual premiums is more than eight percent of your

household income,

Has a gap in coverage for less than three consecutive

months, or

Qualifies for an exemption for one of several other reasons, including having a hardship

that prevents you from obtaining coverage, or

belonging to a group explicitly exempt from the requirement.

Exemptions – some are obtained only through the

Marketplace, some only from the IRS and some from either

the Marketplace or IRS.

An individual may be exempt if he/she:

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For 2014, the annual payment amount is:

Making a Payment – 2014 Year

The greater of:

1% of your household

income that is

above the tax

return filing

threshold for your

filing status, or

Your family's flat

dollar amount, which

is:

But capped at

the cost of the

national average

premium for a

bronze level

health plan

available

through the

Marketplace in

2014.

$95 per adult and $47.50 per child, limited to a family maximum of $285

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Because $497 is greater than $285 (and is less than

the national average premium for bronze level

coverage for 2014), John and Mary’s shared

responsibility payment is $497 for 2014, or $41.41

per month for each month the family is uninsured

(1/12 of $497 equals $41.41).

SCENARIO

Married couple

with 2 children,

$70,000 income

and their filing

threshold is

$20,300.

Example - 2014

To determine their payment using the income formula,

$70,000 (2014 household income). MINUS $20,300 (filing threshold).

$49,700 (the result).

One percent of $49,700 equals $497

John and Mary’s flat dollar amount is $285, or

$95 per adult and $47.50 per child. The total

of $285 is the flat dollar amount in 2014.

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2.5% 2.0%

Making a payment – 2015 and 2016

The income

percentage increases

to 2 percent of

household income and

the flat dollar amount

increases to $325 per

adult ($162.50 per child

under 18).

These figures increase

to 2.5 percent of

household income and

$695 per adult

($347.50 per child

under 18). After 2016,

these figures increase

with inflation.

2016 2015

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Tax-exempt hospitals must attach their

audited financial statements to their Form

990 annually.

IRS mandatory review of every hospital’s

Schedule H once every 3 years. Treasury

thereafter prepares a report to Congress.

New Internal Revenue Code (“IRC”) Section

501(r).

IRS Notices 2014-2 and 3; December 2013.

To date the IRS has not finalized the IRC

Section 501(r) Regulations; end of 2014.

Affordable Care Act; March 23, 2010

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Effective for tax years beginning after March 23, 2012

Internal Revenue Code Section 501(r)(3)

Community Health Needs Assessment (“CHNA”)

Section 501(r)(3) July of 2011 April of 2013

Each hospital

facility must

conduct a CHNA

once every three

years and prepare

and update a

written

implementation

strategy annually.

IRS Notice

2011-52 issued.

IRS released

proposed

regulations.

Adopt and make widely available.

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Section 501(r)(3) Proposed Regulations

“Participates in a hospital facility which is structured as

a flow through entity (LLC or partnership).”

“Making your CHNA widely available.”

“New hospital facilities.”

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Section 501(r)(3) Proposed Regulations

“Collaboration with other hospital facilities; separate written reports per each hospital facility.”

An exception to

the separate

report

requirement was

acknowledged

by the IRS.

A joint report may be

permitted in

situations where the

involved hospital

facilities each define

their communities

identically and

conduct a joint CHNA

process.

The report

clearly identifies

all the hospital

facilities.

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• Attached to the Form 990; or

• Provide on the Form 990 the webpage address(es) on which they are available along with, or as part of, the CHNA.

• In addition, the Form 990 must annually describe the actions taken to address the CHNA significant health needs or state why none were taken and the reasons why.

“Implementation strategy.”

Section 501(r)(3) Proposed Regulations

52

Section 501(r)(3) Proposed Regulations

• Code Section 4959 imposes a $50K excise tax per facility per year; reported on Form 990-T.

• Revocation of tax-exempt status is an option.

• Errors or omissions that are neither willful or egregious will be excused if the hospital facility corrects provides disclosure that is reasonable and appropriate.

• Based upon facts and circumstances on a case by case basis.

• IRS intends to issue a Revenue Procedure.

“Non-compliance with Code Section 501(r).”

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Code Section 501(r)(4)

Compliance with Code Section 501(r)(4)

Financial assistance

policy (“FAP”) and

emergency medical care

policy;

A plain language

summary of the FAP; and

A FAP application form and

instructions.

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Code Section 501(r)(4)

The FAP must contain:

• Eligibility criteria for financial assistance, and whether the

assistance includes free or discounted care;

• The basis for calculating amounts charged to patients;

• The method for applying for financial assistance;

• The actions the hospital may take in the event of

nonpayment if the hospital does not have a separate

billing and collections policy; and

• Measures taken to widely publicize the FAP within the

community served by the hospital facility.

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• Limit amounts charged for medically necessary healthcare

services and emergency medical care for FAP-eligible

individuals.

• Prohibits the use of gross charges.

• A hospital facility must choose and retain 1 of the following:

Code Section 501(r)(5)

Amounts Generally Billed (“AGB”)

Look Back Method

• Medicare fee-for-service only; or

• Medicare fee-for-service and all private health insurers.

Prospective Method

• Medicare fee-for-service only.

• Part A and Part B.

56

Code Section 501(r)(5)

Amounts Generally Billed (“AGB”)

Acceptable AGB methods

to consider.

One average percentage

for all ER and other

medically necessary care

provided by the hospital.

Separate categories of

care (I/P; O/P; different

departments).

Separate items or

services.

Total Claims paid to hospital

total gross charges of claims

x 100

AGB PERCENTAGE

Calculations:

DIVIDED BY

Gross charges x AGB%

AGB

EQUALS

57

Code Section 501(r)(5)

AGB Example

CALCULATE THE AGB

ER / medically necessary

service charge = $10,000

$10,000 x 30% Gross charges x AGB%;

AGB for the ER / medically

necessary service is

$3,000

Total claims paid to hospital

Total gross charges of claims x 100

$300 million / $1.0 billion

$300 = $200 private

insurers; $80 Medicare and

$20 individuals

AGB Percentage = 30%

CALCULATE AGB PERCENTAGE

DIVIDED BY

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A hospital facility must make reasonable efforts to determine whether an individual is FAP-eligible prior to engaging in an ECA.

Code Section 501(r)(6)

Notification Period

• This period begins on the date care is provided and ends on the 120th day after the hospital provides the individual with the first billing statement for care.

Application Period

• A hospital must accept and process FAP applications until the end of the 240th day after the hospital provides the individual with the first billing statement for care.

Extraordinary Collection Actions (“ECA”)

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Code Section 501(r)(6)

Placing liens and/or foreclosing on real property;

Attaching or seizing a bank account or garnishing an individual’s wages; and

Commencing a civil action or causing an individual’s arrest.

An ECA includes any action that requires a legal or judicial process, including:

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Recommendations

60

Form an internal working group for ACA and/or IRC Section 501(r) compliance.

Perform an IRC Section 501(r) readiness assessment.

Review your FAP and billing and collection policies.

Perform an AGB analysis.

Review your written agreements and arrangements with outside entities, e.g. collection agencies.

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Schedule H and Community Benefit

Part Four

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Why is community benefit important?

Supports Federal, state and local tax-exempt status.

Community Benefit

Federal

• Exempt from corporate income tax.

• Issue tax-exempt debt.

• Receive charitable contributions and government grants.

State

• Exempt from corporate income tax.

• Exempt from sales and use tax.

Local

• Exempt from property (real estate) taxes (Provena Medical Center and UPMC).

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Schedule H and Community Benefit

63

64

Schedule H and Community Benefit

64

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• Community benefit definitions and reports.

• Costs, not charges.

• Senate Finance Committee – 5% Test.

• Community benefit, inclusions/exclusions.

FORM 990 – Schedule H

Total benefits to

the community

American Hospital

Association (“AHA”).

IRS definition – Catholic

Health Association

(“CHA”).

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Categories of Community Benefit

Schedule H, Part I, Community Benefit

Financial Assistance

at Cost.

Medicaid and other means

tested programs.

Community Health

Improvement Services and Community

Benefit Operations.

Health Professions Education.

Subsidized Health

Services. Research.

Cash and in-kind

contributions.

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• Two separate reports; based upon 1st and 2nd year filings of Form 990, Schedule H (2009 and 2010).

• AHA released the reports in February of 2012 and April of 2013; www.aha.org.

• AHA Schedule H project.

AHA Schedule H Project

Community benefit – IRS

definition.

Total benefits to the

community.

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AHA project, 2009 and 2010 Form 990, Schedule H, Part I

2009 2010

Small hospitals 7.3% 7.3%

Medium hospitals 8.0% 7.5%

Large hospitals 9.8% 9.2%

Hospital systems 9.3% 8.1%

Overall Average

8.4% 8.2%

AHA Schedule H Project

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Schedule H and Community Benefit

69

70

Schedule H and Community Benefit

70

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Schedule H and Community Benefit

71

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Schedule H and Community Benefit

72

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Schedule H and Community Benefit

73

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Hospital Example

TAX-EXEMPT VERSUS TAXABLE.

Federal corporate income tax $32,464,058

State corporate income tax $ 9,137,517

Local – property (real estate) taxes – est. $10,000,000

State sales / use taxes – est. $ 2,100,000

Total $53,701,575

Less: Schedule H net CB costs: ($19,191,878)

Differential $34,509,697

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Recommendations

Grant to a FQHC or other organizations which provide care to

the indigent and/or Medicaid populations or general purpose

community benefit grant. Alternatively, a grant to an unrelated

tax-exempt hospital?

Community Benefit

Quantitative - #’s and %’s

• Form 990, Schedule H

Qualitative – written community benefit statement

• Form 990, Schedule O

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• Financial assistance does not include self-pay or prompt pay discounts.

• Restricted grants include as direct offsetting revenue.

Part I:

• Requires a state license number for each hospital facility listed.

Part V, Section A:

• Requires the organization to provide the URL for a community health needs assessment that is posted to the hospital facility’s website or other website.

Part V, Section B, Line 5a and 5b:

2013 Form 990, Schedule H Changes

77

Recommendations

77

01.

Benchmark your hospital to its peers, both nationally and

regionally.

02.

Calculate your net community benefit costs and % using methods other than

CHA, including AHA and state reporting and disclose

in Form 990 Schedule O.

03.

Consider a written community benefit

statement to include with your annual Form 990.

04.

Ensure key individuals are aware of your net

community benefit costs and %; including senior

management; Board members and others.

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Foreign Reporting

Part Five

78

79

THE IRS MEANS BUSINESS!

August of 2011; San Francisco man pleads guilty to

hiding $13 million at UBS AG in Switzerland and

agrees to pay $6.8 million FBAR penalty.

Financial Crimes Enforcement Unit.

FinCEN Report 114 supersedes the Form 90-22.1.

Individuals who file FinCEN Report 114 must also

disclose on their Form 1040, Schedule B, Part III.

Foreign Bank Account

80

A U.S. person must file a FinCEN Report 114 if that

person has a financial interest in, signature authority

or other authority over any financial account in a

foreign country and the aggregate value of these

account(s) exceeds $10,000 at any time during the

calendar year.

Filed with U.S. Treasury on or before June 30th.

FBAR records should be maintained 5 years from

June 30th.

Mandatory electronic filing of the FinCEN Report 114.

Who Must File and Due Date

81

Certain entities/owners

of a foreign captive (e.g. hospital).

Certain officers of the owner (e.g.

hospital CEO and CFO) with signature

authority.

The owner of the captive may have

other filing requirements, Forms

5471 and 926.

Form 990, Schedule F, Statement of

Activities Outside the U.S.

Foreign Bank Account

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Deadline is July 1, 2014; 30% withholding tax.

Foreign captive insurance companies.

Determination of a foreign financial institution (“FFI”) or a non-financial foreign entity (“NFFE”).

Most hospital foreign captive insurance companies will be NFFE.

Form W-8BEN-E, Certificate of Status of Beneficial Owner for US Tax Withholding and Reporting (Entities).

Foreign Account Tax Compliance Act

(“FATCA”)

83

Review your captive insurance company as part of your healthcare system.

Review your captive insurance company bank accounts for signature authority.

Confirm that your captive is a NFFE and complete Form W-8BEN-E.

Does your organization have any other foreign investments or foreign bank accounts?

Consider voluntary disclosure options if potential issues are identified.

Recommendations

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Executive Compensation

Part Six

84

85

"The IRS EO division will never stop

looking at NFP executive

compensation and benefits."

Mariani

Statement of Opinion

86

2004 Executive compensation compliance project.

2006 Tax exempt hospital community benefit questionnaire, Form 13790.

2008 Colleges and universities compliance initiative.

2009 IRS governance check sheet, Form 14114.

2010-2012 Employment tax initiative.

2013 Colleges and universities compliance study.

IRS EO and Executive Compensation

87

Who’s looking at your Form 990?

Public Disclosure

IRS State taxing

authority

Employees

current & former

Newspapers Competitors

Unions

The general public;

including donors

Accountants, lawyers and

others www.guidestar.org

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Executive Compensation

88

89

Executive Compensation

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90

Reasonable Compensation

Treas. Reg. 53.4958-4(b)(1)(ii)(A)

Reasonable compensation is the amount ordinarily paid for like services by like

enterprises (whether tax-exempt or taxable) under like circumstances.

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Total Compensation

Form 990, Schedule J, Column E

Total compensation includes all compensation items, whether taxable or not. Items include salary, bonus,

deferred compensation (whether or not funded), payments to welfare benefit plans (medical, dental, life), and taxable and non taxable benefits and de minimis fringe benefits.

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Arrangement approved by the governing body or a committee of

the governing body composed entirely of individuals who do not

have a conflict of interest with respect to the arrangement;

Governing body or committee obtained and relied on appropriate

data as to comparability (internally or externally developed); and

Governing body or the committee adequately documents the

basis for its determination by the later of the next meeting of the

authorized body or 60 days after final approval by the authorized

body.

Burden of proof, IRS vs. tax-exempt organization.

Rebuttable Presumption of Reasonableness

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IRC Section

4958

Effective for transactions

post September 14, 1995.

An enforcement mechanism rather then

revocation of tax-exempt

status.

Intermediate Sanctions

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• An IRC Section 501(c)(3) or (c)(4) tax-exempt organization.

• A disqualified person.

• An excess benefit transaction:

Intermediate Sanctions Criteria O

NE

A non-FMV transaction

(including reasonable compensation).

TW

O

Prohibited revenue sharing transactions.

TH

RE

E

Prohibited transactions involving SO's.

95

The individual must return the amount of the excess

benefit (with interest) to the tax-exempt organization and

pay an excise tax to the IRS.

Potential excise tax due IRS for organization managers

who knowingly approved the transaction knowing it was an

excess benefit transaction.

Disclosure on Form 990, Supplemental Schedule L.

Reasonable Cause.

Automatic Excess Benefit Transactions.

Excess Benefit - Excise Taxes

96

01

• Review your compensation committee.

03

• Ensure the organization satisfies the RPOR factors.

02

• Inclusion of all items for purposes of “total compensation” of each key person.

04

• Obtain a reasonableness opinion.

Recommendations

96

97

Reporting Documentation Process Reasonableness

We are in a challenging Political and Regulatory Environment!

Your organization does not want to be the newspaper story!

Avoiding Intermediate Sanctions

It’s All About

98

Questions & Answers

THANK YOU!

98