What's Happening?
The Internal Revenue Service (IRS) and the Treasury Department plan to issue proposed regulations concerning executive compensation at tax-exempt organizations. This move follows the One Big Beautiful Bill Act, which expanded the application of excise
tax on excessive compensation and parachute payments to top executives. The new regulations aim to broaden the definition of a 'covered employee' to include any highly compensated employee, not just the top five highest-paid. The IRS and Treasury have released Notice 2026-36, clarifying the amended definition and offering exceptions for volunteer services. The proposed regulations are expected to include exceptions for limited hours and nonexempt funds, and they will not apply to tax years before the final regulations are issued. The IRS and Treasury are seeking public comments on the notice and related issues by August 4, 2026.
Why It's Important?
The proposed regulations are crucial for enhancing accountability and compliance among tax-exempt organizations. By expanding the scope of the excise tax, the IRS aims to curb excessive compensation practices that could undermine the integrity of nonprofit organizations. This move could lead to increased scrutiny of executive pay in the nonprofit sector, potentially affecting how these organizations attract and retain top talent. The regulations also reflect a broader effort by the IRS to ensure that tax-exempt organizations adhere to their intended purpose and do not exploit their status for financial gain.
What's Next?
The IRS and Treasury will review public comments and finalize the proposed regulations. Nonprofit organizations may need to reassess their compensation structures to ensure compliance with the new rules. The IRS is likely to increase its oversight of tax-exempt organizations, potentially leading to more audits and enforcement actions. Stakeholders in the nonprofit sector should prepare for these changes and consider engaging in the public comment process to influence the final regulations.
