Published October 28, 2008

2008 Form 990 – Part I

2008 Form 990 – Compensation Best Practices (Part I)

The Internal Revenue Service (“IRS”) has revised Form 990 for the 2008 tax year. PYA has identified a “Best Practices” approach for use by our clients and friends in preparing to use the revised form. This alert focuses on reviewing certain compensation policies and practices of the tax exempt organization.

The 2008 Form 990 revises compensation disclosures in several ways. Management, especially the organization’s financial officers, should immediately familiarize themselves with the various disclosures now contained in Schedule J, Compensation Information. Schedule J is a supplemental disclosure that will generally be required for any officer or key employee earning more than $150,000, and for certain other directors, trustees and former employees.

Part I of Schedule J has several questions that inquire about the use of severance pay plans, supplemental deferred compensation arrangements, revenue and net earnings based pay plans. An affirmative response to these questions (and to the supplemental information requested in Part III) may raise an organization’s risk of an IRS examination. PYA recommends an immediate review of all executive compensation arrangements which will include separate plan documents, employment contracts and other compensation practices.

Severance pay arrangements and deferred compensation plans should be reviewed for compliance with Internal Revenue Code Section 457 and 409A requirements. Section 409A transition guidance expires on December 31, 2008. Any plan revisions (including plan terminations in many cases) must be completed by the end of 2008 in order to avoid severe adverse consequences to plan participants.

Governance practices over executive compensation should also be reviewed. PYA recommends all tax exempt organizations avail themselves of the rebuttable presumption of reasonableness requirements found in the intermediate sanction regulations. Proper use of this presumption shifts the burden of proof to the IRS on issues involving the reasonableness of compensation paid to executives and helps protect the executive and the organization managers authorizing the compensation. Often, PYA finds tax exempt organizations already perform many, if not all of the steps required to satisfy the presumption, but fail to properly approve the compensation or fail to properly document the approval process.

If you have any questions regarding any of the issues raised in this alert or would like to understand how PYA can help your employer in the transition to the revised 2008 Form 990, please contact the experts listed below  at (800) 270-9629.

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW.  THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION.  EACH TAXPAYER SHOULD SEEKADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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