IRS plans rules for executive comp at nonprofits

The Internal Revenue Service and the Treasury Department intend to issue proposed regulations around a section of last year's One Big Beautiful Bill Act limiting the ability of tax-exempt organizations to pay high compensation and parachute payments to their top executives.

The OBBBA expanded the application of excise tax on excess compensation by broadening the definition of a covered employee of an "applicable tax-exempt organization." The tax previously applied to the five highest-compensated employees for the tax year. Now the tax can apply to any employee with compensation exceeding $1 million in a tax year or an excess parachute payment.

Notice 2026-36, which the IRS and the Treasury released Friday, clarifies that the amended definition of covered employee, which will be addressed in the upcoming proposed regulations, includes only:

• Any individual who was an employee of an ATEO in any tax year beginning after Dec. 31, 2016, and on or before Dec. 31, 2025, if the individual was a covered employee for the tax year under prior law, and
• Any individual who is an employee of an ATEO in any tax year beginning after Dec. 31, 2025 (unless a covered employee exception applies).

The notice also offers important exceptions for individuals who provide volunteer services to tax-exempt organizations that could otherwise be impacted by the OBBBA changes. In particular, it allows ATEOs and their related organizations to rely on the limited hours and nonexempt funds exceptions to the post-OBBB definition of covered employee until further guidance is issued.

"The new law strengthens the accountability of tax-exempt organizations by expanding tax compliance requirements for certain organizations paying excessive compensation and excess parachute payments to their executives," said IRS CEO Frank Bisignano in a statement. "It broadens the scope of tax from a limited group of executives to potentially any highly compensated employee."

The Treasury and the IRS expect the upcoming proposed regulations will include covered employee exceptions for limited hours and nonexempt funds. The proposed regulations aren't expected to apply to tax years beginning before the issuance of final regulations.

The Treasury and the IRS are asking for comments on all aspects of the notice, along with any other issues that should be addressed in the forthcoming proposed regulations by Aug. 4, 2026. Comments are especially requested on the issues raised by the latest notice. The full instructions on submitting comments are included within the notice. Last month, the American Institute of CPAs submitted a letter asking for guidance on the excise tax. Ihe letter, the AICPA also asked for transition relief for the excise tax, which would reach as high as 21% of the remuneration over $1 million paid to "covered employees" of "applicable tax-exempt organizations." 

The IRS and the Treasury appear to be cracking down more on charities and nonprofits, while threatening their tax-exempt status if their policies don't align with the administration, adding new questions to the Form 990 filed by them and asking whistleblowers to report signs of possible fraud.