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Health Care

Industry Updates - 2007 Quarter 1

• IRS Releases Report on Executive Compensation
• IRS Releases Draft Good Governances Practices
• IRS Provides Guidance for Governmental Entities to Claim Telephone Excise Tax Refund

IRS Releases Report on Executive Compensation

The IRS recently released its report on executive compensation paid to executives of tax-exempt healthcare and other 501(c)(3) organizations.  The report is the culmination of the Executive Compensation Initiative ("the Project") that was started in 2004.  The Project reviewed compensation information based on compliance check letters sent to 1,223 organizations and examinations of 782 organizations.

The IRS concluded that there are significant reporting issues.  It noted that 30% of the organizations that received compliance check letters amended their Forms 990.  While the IRS has not yet found concerns beyond the reporting issues, the IRS will continue to investigate.  The IRS has assessed penalties in excess of $21 million based on issues in 25 examinations.  The IRS noted that high compensation was found in many cases but generally the compensation was substantiated based on appropriate comparability data.  The full report is available on the IRS Web site.

It is important to note the seriousness that the IRS is taking with respect to executive compensation reporting.  Organizations filing Forms 990 should review their process for compiling the information required to be disclosed and the process for setting executive compensation including documenting their compliance with the rebuttable presumption of reasonableness under Section 4958.

IRS Releases Draft Good Governances Practices

The IRS has introduced draft guidelines and recommendations concerning governance practices for tax-exempt healthcare and other 501(c)(3) organizations.  An IRS official recently explained that the guidelines are intended to help tax-exempt organizations maintain regulatory compliance and public support, but also acknowledged the IRS’s lack of authority to impose standards for board members for running organizations.

In spite of this limitation, the IRS plans to use its oversight authority to assess if tax-exempt organizations are utilizing these recommended guidelines to assist in governance on a “voluntary” basis. The guidelines specifically recommend:

• Adopting a mission statement;
• Implementing  a code of ethics and whistleblower policies;
• Requiring board members to exercise due diligence with respect to ensuring they have sufficient information to fulfill their duty of care and act with the organization’s  best interest in mind;
• Adopting enforceable conflict of interest policies;
• Mandating full and accurate information be available to the board members, regulators, and the public;
• Requiring truthful, accurate, and candid fundraising activities and methods;
• Implementing better-quality financial auditing protocols, including use of audit committees, additional internal reporting, and independent auditors;
• Enhancing controls over compensation decisions; and,
• Creating document retention policies.

The IRS is still assessing the guidelines and other recommendations and should finalize them by the end of 2007.   Tax-exempt organizations may want to review their existing policies and determine where they could improve their governance practices.

IRS Provides Guidance for Governmental Entities to Claim Telephone Excise Tax Refund

When the IRS announced the procedures for claiming refunds of telephone excise taxes, they did not provide guidance to governmental entities.  It was initially thought that governmental entities would claim the refund on the Form 990T.  The IRS just released guidance for governmental entities to claim the excise tax refunds.  Governmental entities should not file a Form 990T.  A governmental entity may request a refund directly from the telephone service provider or by filing a Form 8849 with the IRS.

The new procedures address the fact that governmental entities were exempt from all telephone taxes under Section 4253(i) and thus Notice 2006-50 would not apply.  Since Notice 2006-50 does not apply, governmental entities must calculate the actual taxes paid.  This is important because governmental entities may be entitled to greater refunds if they were paying any telephone taxes.

A governmental entity can request a refund of:

1. Federal excise taxes on long distance service billed after February 28, 2003, and
2. All Federal telephone excise taxes billed after December 31, 2003. 

The IRS specifically noted the time for the refund claims to be submitted.  This is due to the general statute of limitations for refund claims provided by the Internal Revenue Code.  It is interesting to note that it appears the IRS will waive the statute for Federal excise taxes on long distance service billed after February 28, 2003.  Thus governmental entities should make their claims as soon as possible.

Under the new guidance, a governmental entity requesting a refund from the IRS should do the following:

• Complete Form 8849
• Note in red across the top of the form, "Not a Notice 2006-50 Claim"
• Complete the identifying information at the top of the form, check the box for Schedule 6, sign and date the form
• Complete From 8849, Schedule 6
• Complete a line for each quarter you are requesting a refund
• Indicate on the form that the request is pursuant to IRC Section 4253(i).  Also indicate that the telephone service provider erroneously imposed communication taxes on the governmental entity
• Disregard the “Caution” on page 2 of the Form 8849 instructions
• Mail Form 8849 and Schedule 6 to
  Internal Revenue IRS
  Cincinnati, OH 45999-0002

Go to the IRS Web site for specific IRS guidance concerning telephone tax refunds for government entities.

©2008 Moss Adams LLP

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