Nonprofit Executive Pay Placed under IRS’ Microscope

Corporate executives are not the only ones whose pay is being scrutinized — top officials at nonprofit organizations can expect regulators to take a hard look at how much they earn.

The Internal Revenue Service and state regulators are planning to contact hundreds of nonprofit organizations about pay practices for their top officials. Some groups may be audited.

Steve T. Miller, director of the IRS' exempt-organizations division, told the Wall Street Journal that the agency has identified between 100 and 200 groups in which an executive or board member earns more than $1 million a year. "We'd like to increase the tension in decision-making about compensation in the nonprofit area," Miller said.

The new push comes amid anger over revelations of exorbitant executive pay in the wake of a string of corporate accounting scandals over the last several years.

The IRS has the power to fine executives at nonprofits who receive excessive salaries and benefits as well as the officials who approve the deals.

Compensation for nonprofit officials is supposed to be based on documented data comparing the pay or benefits with similar positions or organizations. IRS rules allow comparisons with for-profit businesses where appropriate, but "appropriate" is undefined.

"The unintended consequence of that law has been to ramp up compensation significantly" among nonprofits, said Marcus Owens, a partner at Washington law firm Caplin & Drysdale who ran the IRS' exempt-organizations division until 2000.

Nonprofits — which number about 1.8 million, up from 739,000 25 years ago — include more than traditional charities. Also considered nonprofits are universities, hospitals, health plans, labor unions, trade associations, professional sports leagues, research institutes, credit unions and rural electric cooperatives that own nuclear power plants, the Journal reported.

Nonprofits that are most similar to commercial businesses pay their top officials the biggest salaries. Owners of the 32 National Football League teams, for example, paid league commissioner Paul Tagliabue a $6.4 million salary for the year ended March 31, 2003, according to an IRS filing by the league.

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