Intermediate Sanctions

Case Example

At the beginning of this section, it was stated that the penalties could be severe and costly.Let's look at a case…

Jim Delaney is director of the university foundation at a large public university. He was promoted to the position two years ago after the previous director died suddenly of a heart attack after 25 years on the job. He previously held a position as a department head in the foundation. The appointment needed to be made in a hurry, so Jim was offered the job at the previous director’s salary of $275,000.

The IRS has called into question Jim’s salary for the past two years charging that it violates the Intermediate Sanctions law. Their claim is that the $275,000 salary is too high based on two factors:

1. Comparable salaries for directors of university foundations in the area and of comparable size are approximately $230,000.
2. It's inappropriate for Jim to receive the same salary as his predecessor given his lack of experience on the job.

The IRS claims that Jim's salary should be $200,000 since he's still new on the job.

Jim looks up the intermediate-sanctions law and finds that he could be liable for the following:

1. Repayment of $150,000 in excess benefits for 2 years overpayment of salary plus $8,350 in interest
2. An excise tax of 25% of $150,000 = $37,500
3. If not paid in 90 days, a 200% tax of $300,000
4. Since he participated in the decision, he is 1 of 4 people liable for the maximum penalty of $20,000 ($5,000 in his case).

Q: What's the best scenario for Jim, assuming the IRS argument holds up?

A: Jim should return $150,000 in overpayment of salary plus $8,350 in interest to the foundation within 90 days. He will be able to receive a tax abatement on the excise taxes due.