AICPA Questions IRS Approach to Section 4960 Tax Changes

Some tax rules arrive like a clean audit adjustment. Others show up like a shoebox full of receipts dumped on your desk at 4:58 p.m. on a Friday. That is roughly how many nonprofits, universities, hospital systems, and trade associations are reacting right now. The AICPA formally asked Treasury and the IRS for guidance and transition relief after Congress expanded Section 4960 under the One Big Beautiful Bill Act (OBBBA). At the center of the issue: a 21% excise tax on compensation above $1 million paid by applicable tax-exempt organizations (ATEOs). The tax itself is not new. The reach of it suddenly is. And a lot of nonprofit finance teams are now staring at their org charts thinking: "Wait, we have to track who now?"

Who's a "Covered Employee" Now?

Before OBBBA, Section 4960 targeted a relatively contained group: the top five highest-paid employees at a nonprofit, plus anyone previously classified as covered in earlier years. Painful to manage, but manageable. Congress rewrote that math last year. Starting with tax years beginning after Dec. 31, 2025, the definition expands to include essentially all employees of an ATEO, covering individuals employed in any tax year beginning after Dec. 31, 2016. That retroactive-looking language has accountants reaching for the aspirin bottle. Key concerns the AICPA flagged immediately:

• Fiscal-year filers face retroactive exposure on compensation paid before OBBBA even passed
• Related organizations sharing executives or staff with ATEOs may get pulled into the net
• Historical records stretching back to 2017 could suddenly become compliance-critical

That is not just a technical headache. That is operational chaos. Imagine a nonprofit hospital system reconstructing compensation histories for temporary executives, interns, and visiting physicians stretching back nearly a decade. Somewhere in America, a controller definitely muttered, "You've got to be kidding me."

Did Volunteers Just Become Taxable?

This is where the story gets strange. The AICPA flagged that unpaid volunteers connected to related entities could get swept into compliance tracking obligations if Treasury does not create clear exceptions. Think about how many nonprofits rely on volunteer board members, affiliated professionals, or executives splitting time between taxable and tax-exempt entities. Under a strict reading of the current statute, organizations may feel pressure to document those relationships with forensic-level detail. The intern problem is equally real:

• A summer intern who briefly worked at an ATEO in 2017 could theoretically remain classified as a "covered employee" indefinitely
• This creates ongoing tracking obligations years after that person moved on entirely
• Without a fix, both the individual and the organization face outcomes wholly disproportionate to a three-month internship

The AICPA is requesting a de minimis exception to prevent exactly these outcomes for short-term or part-time workers. That is not lobbying. That is common sense.

Why Nonprofits Are Extra Nervous

Because this rule does not land in isolation. The IRS and Treasury have already increased scrutiny on tax-exempt organizations. Regulators have signaled plans to revise Form 990 reporting to collect additional donor-related information, and the IRS has separately encouraged whistleblowers to report nonprofit misconduct. The enforcement environment is sharper than it was two years ago. The structure problem compounds everything:

• Universities have foundations
• Hospital systems have affiliates
• Trade groups have related entities with shared executives and governance layers

Layer retroactive employee tracking onto those structures, and even sophisticated finance departments start looking shaky. Mid-sized CPA firms serving nonprofit clients are already fielding questions: Do we need 2017 payroll records? Are related entities exposed? What about volunteers? The honest answer right now: we still do not fully know.

Policy Win or Paperwork Nightmare?

Section 4960 was originally designed to mirror executive compensation limits imposed on public companies. If nonprofits pay massive executive packages, they face parallel tax friction. Reasonable policy on paper.

But once the rule expands from top executives to potentially all employees over multiple years, the compliance burden starts outweighing the original objective. Finance teams stop focusing on governance risk and start building databases to track former interns from nearly a decade ago. What the AICPA is specifically asking Treasury to fix:

• Transition relief for fiscal-year filers to prevent retroactive tax application
• Extension of limited-hours and limited-services exceptions already in existing regulations
• A clear regulatory carve-out so unpaid public volunteers are not roped in as covered employees

Without that guidance, organizations may restructure defensively, pulling back on shared staffing models or rethinking affiliated entity arrangements entirely.

Takeaway

The biggest risk today is not the tax itself. It is the uncertainty sitting on top of it. Treasury and the IRS still have time to issue practical guidance before expanded rules take effect after Dec. 31, 2025, and most practitioners expect some transition relief. Still, waiting on Washington is not a strategy. Review executive compensation structures, audit payroll data retention policies, and flag volunteer and related-entity arrangements with nonprofit clients now. Document that you raised it. As Warren Buffett once said, "Risk comes from not knowing what you're doing." Right now, a lot of organizations are trying to figure out exactly what the government expects them to do, and until clearer guidance arrives, that uncertainty may be the most expensive line item of all.