Congress is asking questions about the high salaries paid to college football coaches at some top schools that receive tax exemptions from the Internal Revenue Service.
House Ways and Means Oversight Subcommittee chairman Bill Pascrell, D-New Jersey, sent letters last week to the presidents of
The letters relate to a provision of the Tax Cuts and Jobs Act of 2017 that levies a 21% excise tax for employees of nonprofits who earn $1 million or more in salary and “excess parachute payments.” The IRS released
“College football games are in recess, but there is no offseason for congressional oversight,” Pascrell said in a statement. “Today we are expanding our inquiry into exorbitant college coaching deals by looking at Stanford and Rutgers. Americans across the country have a right to know if their tax dollars are being wrongly used to pad the pockets of athletic coaches in public and private institutions of higher education. With an eye towards fairness, our Oversight Subcommittee will keep shining a light on any possible abuses of our Tax Code.”
He asked Rutgers, for example, how many university employees have a compensation package (amounts provided in pay and benefits) above $1 million each year, and how many employees work for the athletics department, what departments employ the other university employees earning in excess of $1 million, and how many employees in the athletics department are paid over $5 million each year. “Does Rutgers take the position that the tax under Section 4960 of the Internal Revenue Code applies to it?” Pascrell asked. “If so, how much tax has the university paid under Section 4960 each year since its enactment? How many employees have triggered the tax in each of those years? For employees compensated above the Section 4960 cap, what is the median and average dollar amount of the excess above the cap?”
The provisions apply to more supposedly tax-exempt organizations than only colleges and universities. Hospital chain executives who earn over $1 million could also subject their hospitals to the new rules, as well as high-earning leaders at major charities and even faith-based organizations like megachurches that provide pastors with private jets and other lavish perks.
Lawmakers aren’t the only ones asking questions. The IRS has also been sending compliance check information request notices to tax-exempt organizations on Form 4720, “Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code.” Form 4720 is used for reporting the excise tax imposed by Section 4960. The compliance notices are automatically generated and the IRS has been casting a wide net to identify noncompliance. However, reporting an individual with compensation of more than $1 million doesn’t automatically mean the organization has an excise tax liability under Section 4960 because the remuneration defined that provision of the Tax Code isn’t necessarily the same as the compensation reported in Part VII of the Form 990 information return filed by tax-exempt organizations.
“It’s difficult to quantify the impact here from a broader industry perspective, but I can speak from what we’ve seen in our practice,” said Mallory Fairless, a partner elect at Crowe LLP. “In serving our tax-exempt clients, we recommend that every organization, at a minimum, develop a listing of covered employees, regardless of whether the organization believes they will be subject to the excise tax for excess remuneration or excess parachute payments under Section 4960. The reason for this is due to how a covered employee (CE) is defined.”
She noted that for purposes of Section 4960, a covered employee is:
1. Any individual who is one of the five highest-compensated employees of the applicable tax exempt organization (ATEO) for a taxable year (without regard to the $1 million excess remuneration threshold); or,
2. Was a covered employee of the ATEO (or any predecessor) for any preceding taxable year beginning after Dec. 31, 2016 (Note: this means, once an individual is a CE, they will always be considered a CE).
“Identifying an organization’s covered employees is a necessary step for an ATEO, regardless of whether they believe they will have an excise tax liability under Section 4960,” said Fairless. “While an individual may not have remuneration in excess of the $1 million threshold at present, they may in the future, and whether their remuneration is subject to the excise tax will depend on appropriate classification as a covered employee or not.”
Crowe has been seeing more tax-exempt organizations of various kinds filing the forms with the IRS in recent years. “We continue to see the number of these filings (Forms 4720) increase each year,” said Fairless. “The excise tax for an ATEO under Section 4960 is reported on Form 4720. For tax years 2018 through 2020, our practice filed more than 100 Forms 4720 on behalf of our clients to report an excise tax liability under Section 4960. Note this only represents the number of Forms 4720 filed. Each Form 4720 may include one or multiple individuals with remuneration subject to the excise tax. As we continue to complete 2020 tax year filings for our fiscal year filers, and begin filing 2021 returns, we expect the number of Forms 4720 filings to continue to grow exponentially.”
The reporting doesn’t have to be overly complicated or daunting for most tax-exempt organizations. “In terms of reporting, while the Form 4720 for reporting the excise tax itself is very straightforward, the underlying detail and calculation to arrive at ‘excess remuneration’ and ‘excise parachute payment’ subject to the excise tax, is extremely complex,” said Fairless. “While ‘remuneration’ for purposes of Section 4960 means ‘wages’ as defined in Section 3401(a), certain modifications must be made to wages (for example to exclude designated Roth contributions and include amounts required to be included in gross income under Section 457(f)). Arriving at these modifications can be an arduous process, typically requiring careful review of employment agreements, bonus and incentive plan documents as well as 457(f) plan documents.”
