IRS (Internal Revenue Service), as we all know is a U.S government agency whose sole purpose is to enforce tax-related laws and collect the tax as well. When it comes to non-profit executive compensation, boards have a responsibility only to approve “reasonable and not excessive” compensation arrangement and no non-profit executive compensation negotiation shall affect it.
In case of excessive compensation, the person having it and the one who approved it, both are held guilty and liable for it. Therefore, IRS has stated three requirements for non-profit executive compensation to eliminate any confusion and misconception in this regard and to avoid nonprofit executive compensation negotiation as well. The following are the three requirements of IRS for non-profit executive compensation.
- Approval of Compensation by Board of Directors
The compensation arrangements of an executive should be approved by the board of directors in advance. However, it should make sure that no member of the board has a conflict of interest with the executive whose compensation is to be approved, i.e. they should not be related to each other, the member should not benefit from the compensation in any way.
- Compensation Matches with Other Organizations
The compensation benefits should match with the ones given by other similar organizations in the same geographical area.
- Documentation of the Compensation Records
The authorized committee, i.e. the board of directors should document everything related to compensation arrangements. These things include the compensation benefits and its terms, the date at which the compensation is approved, list of members taking part and another list of the members who voted in favor of the compensation and those who disapproved the compensation and the comparison of compensation with that of other similar organizations as well.
The organization should fulfill these requirements of the Internal Revenue Service and should keenly track the non-profit executive compensation records to avoid getting in trouble with the IRS.