The IRS Calls Nonprofits to Account

Tax-exempt organizations that lavish fat salaries and gold-plated perks on executives and insiders have a lot of explaining to do

By Jessi Hempel

After years of scrutinizing the excesses of Big Business, government regulators are starting to extend their focus to the nonprofit world. On Aug. 10, the Internal Revenue Service announced a sweeping investigation of 2,000 of the nation's 1.8 million tax-exempt organizations. The goal: to probe pay packages and ferret out insider dealings. This move follows the June decision to look into some 200 charities that reported executive pay packages in excess of a million dollars. To carry out the investigations, the IRS has begun hiring as many as 73 accountants, bringing the tax-exempt division up to 300 agents.

The IRS won't say who's on its list, but a BusinessWeek analysis of public tax records suggests most will be universities and hospitals, where executives often receive salaries in excess of a million dollars. Many museum directors, orchestra conductors, and endowment managers also bring home generous salaries. A fair number of charities and foundations report million-dollar pay packages as well.


  The IRS plans to look beyond the million-dollar mark to target any nonprofit where high salaries or questionable contracts set it apart from its peers. "We're targeting outliers," says Steven Miller, commissioner of the tax-exempt and government entities division at the IRS.

One likely audit candidate may be the Statue of Liberty-Ellis Island Foundation, which has recently come under investigation by the Senate Finance Committee for a variety of alleged abuses. Among them: consulting contracts in excess of $100,000 received by CEO Stephen Briganti, questionable fundraising techniques, and $45,000 spent on a dog that chases geese off the island. A Liberty-Ellis Island Foundation spokesperson says all expenses are justifiable, and that the foundation is refining consulting policies at the suggestion of an outside review committee.

Several other public charities report substantial pay packages. Among them: Ray George, Jr., the CEO of Normative Services, a Sheridan (Wyo.)-based home for troubled youth, received $1.2 million in 2002, while his wife, the board president, was paid $900,000. Meredith Merrick served a combined role as vice-president of Good Companion Broadcasting, a Haberstown (Md.)-based Christian broadcasting station, and as general manager of WJAL-TV. In 2001, the year that Good Companion Broadcasting sold WJAL-TV to Spanish-language network Entravision Communications (EVC ) for $10.3 million, Merrick received a salary of $2.4 million.

Some private foundations also have been spotlighted for bloated compensation packages. Consider the Needham (Mass.)-based Paul & Virginia Cabot Charitable Trust, which reported assets totaling about $5 million in 2002. Though the foundation made just $401,000 in grants, Paul Cabot Jr. paid himself more than $1.3 million to serve as trustee. The Massachusetts attorney general is investigating the foundation, and Victoria Bjorklund, chair of the IRS Advisory Committee on Tax Exempt & Nonprofit Entities, says it will likely be on the IRS's watch list. Cabot didn't return calls for comment.


  Investigations are vital after several years of highly-publicized charity abuses, says Bjorklund, adding: "The public needs confidence in charities." She predicts the IRS will make a few examples out of smaller nonprofits that are riddled by abuses. This, she says, is the necessary cost of insuring charities are earning their tax-exempt status by working collectively for society's good.

Meanwhile, Marcus Owens, former director of the Exempt Organizations Division for the IRS, says charities must act proactively to set compensation fairly and monitor sweetheart deals by reviewing salaries at peer organizations and seeking advice from outside review committees. With the IRS threatening stiff penalties and even the loss of tax-exemption status, it may be time for some housecleaning.

Hempel is a staff editor for BusinessWeek in New York.

Before it's here, it's on the Bloomberg Terminal.