Washington, D.C. (May 8, 2026) – In a letter submitted to the Internal Revenue Service (IRS), the American Institute of CPAs (AICPA) requested Treasury and IRS provide guidance addressing Section 4960, which was amended last year by the OBBBA (One Big Beautiful Bill Act). Section 4960 imposes an excise tax on applicable tax-exempt organizations (ATEO) equal to 21 percent of the remuneration in excess of $1 million paid to “covered employees” of the ATEO.
When first enacted, the definition of a “covered employee” under section 4960 was limited to the top five highest-compensated employees of the ATEO, 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 December 31, 2016. This change is effective for the first taxable year beginning after December 31, 2025.
The AICPA’s letter offers the following recommendations on the following matters emerging from the OBBBA revisions to section 4960:
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 One Big Beautiful Bill Act
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. Absent a de minimis exception, both these individuals and the ATEO and 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 January 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,” says Scott Klein, Senior Manager, AICPA Tax Policy & Advocacy. “Without this guidance, nonprofits and related organizations could face unexpected excise taxes, added compliance burdens and heightened financial risk under current law.”
About the American Institute of CPAs
The American Institute of CPAs (AICPA) is the world’s largest member association representing the CPA profession, with 397,000 members and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education, and consulting. A founding member of the Association of International Certified Professional Accountants, the AICPA sets ethical standards for the profession, attestation standards, and U.S. auditing standards for private companies, not-for-profit organizations, and federal, state, and local governments. It develops and grades the Uniform CPA Examination, offers specialized credentials, partners across the profession to build future talent, and drives continuing education to advance the vitality, relevance, and quality of the profession.
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Contact: Veronica L. Vera
202-434-9215
Veronica.Vera@aicpa-cima.com