Responding to recent Congressional criticism and changes in the market place, the IRS has increased its scrutiny of not-for-profit hospitals, particularly in the areas corporate governance and employee compensation. In 2006, the IRS sent more than 500 not-for-profit hospitals compliance questionnaires in order to study the charitable operations of tax-exempt hospitals and to determine the processes these hospitals use to establish and report executive compensation. In 2008, the IRS released a redesigned Form 990 that includes additional disclosures regarding an organization’s governance practices and employee compensation. Several IRS officials have stated their belief that a well-governed charity is more likely to correctly follow the tax laws, safeguard charitable assets, and serve charitable interests than one with poor governance. Consistent with this view, the IRS has indicated that it is especially important for a charitable organization to implement certain policies and procedures to ensure that reasonable compensation is paid to officers, directors, trustees, key employees and highly compensated employees.
The redesigned Form 990 includes a new definition of the term “key employee.” Under this new definition, we are seeing more physician compensation disclosures being made available to the IRS (and thus, to the general public). Physician compensation is of interest not only to the IRS but also to other government agencies, such as the Office of Inspector General and the Department of Justice.
The Internal Revenue Code does not require charities to follow a particular process to determine fair and reasonable compensation. Nevertheless, we have identified certain best practices that should be followed to help protect your organization’s tax-exempt status and to document the fair market value of amounts paid to employees in the event of a challenge from other government agencies.
We would be happy to review your hospital’s oversight of employee compensation. If you have any questions regarding best practices for corporate governance and for determining reasonable compensation of amounts paid to employees of not-for-profit hospitals, please contact the expert 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 SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
