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Now that the Internal Revenue Service has confirmed it is scrutinizing the finances of 501(c)6s, one of the triggers of an audit is executive compensation. Too high, in an examiner's mind, could put an association under the IRS microscope. A simple defense, however, can be something that is common in the association community - salary surveys.
George Constantine, an attorney in the Associations and Nonprofits Group of Venable LLP's DC office, says associations can learn from the experiences of (c)3s and (c)4s, which have been dealing with IRS scrutiny of executive compensation since the 1990s, covered by the intermediate sanctions law. Large nonprofits often hire compensation consultants to create analyses that support the executive compensation levels they pay out. But smaller nonprofits often rely on salary surveys.
When a nonprofit uses a survey to support its salaries, one of the key indicators the IRS looks for is valid comparability data, and the more detailed, the better, Constantine says. Boards that use salary surveys to set compensation should look at the publisher's methods, and ensure that variables such as size of organization or geographic location are included.
Worst-case scenario of a (c)6 association running afoul of IRS regulations is revocation of exempt status, but Constantine says the IRS "probably would have to see something egregious" for that to happen.
"Even in the (c)6 context, it's wise to follow the same sort of steps that apply to the (c)3 and (c)4 intermediate sanctions law. Make sure you get valid comparability data when setting compensation," Constantine advises.
Editor's note: Association TRENDS currently is compiling our National Compensation Report. Participation is free, and participating associations receive an executive summary. Go to www.AssociationTRENDS.com/NationalReport.