Intermediate Sanctions

Penalties for Organization Managers

When an initial tax is imposed on a disqualified person, a second tax is imposed on any and all organization managers who knowingly participated in the excess benefit transaction, unless the participation was not willful and was due to reasonable cause. The IRS has the burden of proof to establish that the organization manager(s) participated knowingly and that participation was willful and not due to reasonable cause.

The tax is 10% of the excess benefit charged against the disqualified person up to a maximum of $20,000 per incident. This maximum is for all organization managers, not each one.

Example: If there are 4 organization managers, the maximum is $5,000 for each.

Q: What if the disqualified person is also one of the organization managers?

A: He or she can be penalized in both categories.

Technically then, a disqualified person could be fined 25%, 200%, and their portion of 10% of the excess benefit AND be required to pay back the amount of the excess benefit with interest.

Participation

A person has participated in a transaction when he or she takes some affirmative action with regard to the transaction. This may include not doing anything when, in the case of a manager, he or she should have acted.

Q: When is an organization manager said to have NOT participated?

A: When they oppose the transaction and this is recorded.

Knowing

An organization manager participates knowingly if he or she:

• has actual knowledge of sufficient facts so that, based solely on those facts, the transaction would be an excess benefit transaction
• is aware that the transaction under these circumstances may violate the provisions of the regulations governing excess benefit transactions
• is aware that it's an excess benefit transaction or fails to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction

Q: What if the organization manager has consulted a professional, made a full disclosure of facts, and relied on a reasoned written opinion from that professional?

A: The organization manager's participation is NOT considered knowing.

Organization managers may rely on lawyers, certified public accountants, and compensation consultants.

Willful

An organization manager's decision in an excess benefit situation is willful if it's:

• voluntary
• conscious
• intentional

An organization manager's participation is NOT willful if the manager does not know that the transaction is an excess benefit transaction.

Reasonable cause

The Intermediate Sanctions regulations protect managers from penalties provided that their participation in an excess benefit transaction has reasonable cause meaning that the manager has exercised their responsibility with “ordinary business care and prudence” by following the guidelines of having approval from an independent board, using comparability compensation data, and documenting the decision and data it was based on.