Intermediate Sanctions

Introduction

Intermediate sanctions are regulations found in IRC Section 4958 that give the IRS the authority to penalize disqualified persons for receiving excess benefit transactions from 501(c)(3) and 501(c)(4) tax exempt organizations. Organization managers involved in such transactions are also subject to penalties.

Applicable organizations:

• 501(c)(3) – religious, educational, charitable, scientific, literary, public safety testing, promoting national or international amateur sports competition, prevention of cruelty to children or animals
• 501(c)(4) – civic leagues, social welfare organizations, local associations of employees

Previous to the adoption of intermediate sanctions, the only sanction available to the IRS for certain violations of rules concerning transactions between non-exempt organizations and their officers was disqualification as a non-exempt organization. Because of its extreme nature, this action was rarely used. Plus, this action harmed those people aided by the tax-exempt organization as much as or more than the people involved in the violation.

Intermediate sanctions provide the IRS with the ability to penalize wrongful activities within tax-exempt organizations without having to go to the extreme of revoking the organizations' tax-exempt status.

Course Overview

This course will start with an overview of intermediate sanctions, including the doctrine of private inurement and the concept of private benefit. After this, we'll examine who is at risk of penalty under intermediate sanctions. We'll look at the role of organization managers and outside advisors, as well as discover who is considered to be a disqualified person under these rules.

We'll also explain how an organization can establish a rebuttable presumption of reasonableness, whereby the burden of proving the unreasonableness of compensation shifts to the IRS, provided that an organization has met certain conditions in its compensation planning process.

One of these conditions is the use of appropriate compensation data for similar organizations. A best practice is to retrieve this data from multiple sources and we'll show you how, including using ERI's nonprofit executive compensation tool, the Nonprofit Comparables Assessor, that has been utilized by the IRS and State Attorneys General.

Finally, we'll examine the penalties that occur should a violation be proven. These include correction via repayment, an excise tax required to be paid by the employee who received the excess benefit, and an additional tax on all organization managers who knowingly participated in the process.