AICPA asks IRS for guidance on excise tax at nonprofits

The American Institute of CPAs is asking the Internal Revenue Service and the Treasury Department for more information on a provision of the One Big Beautiful Bill Act imposing an excise tax on tax-exempt organizations whose top executives are paid over $1 million.

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The letter, sent May 1 by the AICPA, also asks 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.”

“Given the scope and magnitude of the changes made by the OBBBA to section 4960, we recognize and appreciate the need for comprehensive guidance,” wrote AICPA Tax Executive Committee chair Cheri Freeh. “However, we respectfully urge [the] Treasury and the IRS to prioritize the issuance of transition relief to address several immediate issues that could disrupt the operations of tax-exempt organizations. Absent timely transition relief, these issues may result in significant and unintended financial exposure for tax-exempt organizations and related entities subject to the section 4960 excise tax.”

The AICPA pointed out that when the legislation first enacted, the definition of a “covered employee” under Section 4960 of the Tax Code was limited to the top five highest-compensated employees of the applicable tax-exempt organization, in addition to any individual who would have been a covered employee in a prior taxable year. Section 70416 of OBBBA amended Section 4960 to expand the definition of a “covered employee” to include all employees of an ATEO (not only the top five highest-compensated employees), including any individual employed during any taxable year beginning after Dec. 31, 2016. The change took effect for the first taxable year beginning after Dec. 31, 2025.

The IRS and the Treasury Department have been cracking down on nonprofits, especially universities and advocacy groups, under the Trump administration, threatening to revoke their tax-exempt status. The Treasury and the IRS announced plans last month to revise the Form 990 filed by charities and other tax-exempt organizations covered by Section 501(c)3 of the Tax Code, requiring more information about their donors in an effort to uncover fraud and hidden sources of funding. The IRS is also encouraging whistleblowers to come forward with tips about tax-exempt organizations and their officials, such as false statements or misrepresentations in grant applications; misuse of federal funds and grants including the diversion of funds for personal use; self-dealing or undisclosed conflicts of interest; and improper payments to insiders, officers or related parties.

The AICPA made several recommendations in the letter: 

• Provide transition relief for fiscal year applicable tax-exempt organizations.
• Applying transition relief would prevent the tax from being applied retroactively to remuneration paid prior to the enactment of OBBBA changes. 
• Provide transition relief for applicable tax-exempt organizations and related entities utilizing the current regulatory exceptions to the definition of “covered employee.”
• Without updated government guidance, some organizations may feel forced to make major changes like restructuring their workforce, scaling back operations, or even shutting down entirely.
• Provide transition relief for de minimis employment prior to enactment of the OBBA.

People who briefly worked or worked part‑time for certain ATEOs, such as interns, as far back as 2017 could be permanently classified as covered employees, triggering indefinite tracking obligations and excise tax for related organizations years later, without any ability to anticipate these consequences, the AICPA noted. Without a de minimis exception, these individuals and the ATEO as well as related entities could face outcomes that are wholly disproportionate to the nature and duration of the individuals’ service.

• Transition relief for employees of related entities providing services as traditional unpaid volunteers of an applicable tax-exempt organization.

Without this transition, it could create an overwhelming burden on ATEOs, who would then have to track every volunteer that provided services to the ATEO, potentially retroactive to Jan. 1, 2017, to ensure that neither the ATEO nor a related entity had failed to identify a covered employee.
“Our letter requests guidance providing transition relief for fiscal-year filers; extension of the limited hours, nonexempt funds, and limited services exceptions; and a clear regulatory exception so unpaid public volunteers are not treated as covered employees,” said Scott Klein, senior manager of tax policy and advocacy at the AICPA, in a statement last Friday. “Without this guidance, nonprofits and related organizations could face unexpected excise taxes, added compliance burdens and heightened financial risk under current law.”