IRS Form 990 is not just a financial return. It is a highly public governance scorecard. The IRS uses the Form 990 to ask direct, uncomfortable questions about how your board operates:
- Did the organization review executive compensation using comparability data?
- Is there a written conflict of interest policy?
- Are board minutes drafted for every meeting?
- Does the board have independent, unrelated directors?
The Danger of Excess Benefit Transactions
If a board approves a salary, benefit package, or contract for an executive that exceeds "Fair Market Value," the IRS defines this as an Excess Benefit Transaction.
Under IRC Section 4958, the IRS can levy massive, crushing penalties:
- A 25% tax on the executive for the excess amount (rising to 200% if not corrected immediately).
- A 10% personal tax (up to $20,000) on the individual board members who knowingly voted to approve the unreasonable compensation.
How to Protect Your Board: The Rebuttable Presumption
Fortunately, the IRS provides a safe harbor known as the Rebuttable Presumption of Reasonableness. If you follow three strict steps, the IRS must prove the compensation is unreasonable, rather than the board proving it is reasonable:
- Disinterested Board Approval: The compensation must be reviewed and approved in advance by an authorized body (the board or a compensation committee) consisting entirely of individuals who do not have a conflict of interest. The executive must leave the room.
- Independent Comparability Data: The board must obtain and rely on appropriate comparability data prior to making its decision. This includes salary surveys of similar-sized organizations in your geographic region, or documented salary offers from comparable institutions.
- Concurrent Written Documentation: The board must adequately document the basis for its determination concurrently (within 60 days of the decision, or before the next meeting, whichever is earlier). The minutes must record: the approved amount, the comparability data relied upon, and the specific directors who voted.