The IRS and
Nonprofit Leadership
Accountability
A Discussion of “Intermediate Sanctions”
Disclaimer
Nothing in this presentation is intended to be legal
or tax advice. Always consult with
knowledgeable counsel o...
Honesty cartoon
Nonprofits in the News
(usually for the wrong reasons!)
•
•
•
•
•
•
•
•
•

United Way of America – William Aramony
Septemb...
IRS historical approach to exempt
organization (EO) (nonprofit org.)
enforcement
The nonprofit
organization
risked loss of...
Change in approach –
rationale
• Perception by IRS & Congress that
nonprofits are getting away with abuses of
their tax-ex...
Definition of
“Intermediate Sanctions”
The penalties imposed under Internal
Revenue Code Section 4958 on persons
involved ...
Excess benefit transactions –
general
“A transaction in which an economic benefit is provided by an
applicable tax-exempt ...
Organizations covered under IS
• 501(c)3 (charities) and 501(c)4 (social welfare)
organizations
Note: private foundations ...
Conflict of interest cartoon
Conflicts of Interest
•
•
•
•

Conflicts are almost inevitable
A conflict is not necessarily illegal
Conflicts must be dis...
Individuals covered under IS
“disqualified persons”
•
•
•
•

All voting board members and their family members
All CEOs/Ex...
Penalties for excess benefit
transactions
First tier penalties
• Individual benefiting – 25% excise tax on the
amount of t...
Conflict of interest cartoon 2
Excess benefit transactions -employees
Compensation
• Includes all salary, commissions, fringe benefits (except
for certai...
"Safe harbor" -- "rebuttable
presumption of reasonableness"
Examples:
• Board-led executive compensation studies on file
•...
Demonstrate reasonableness through
documentation – document, document,
document!
• Conflict of interest policy for organiz...
Enforcement risks
The IRS may, or may not, investigate your nonprofit’s practices,
but others are often more likely to ask...
Additional resources
• IRS web site:
http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Intermediate-Sanc...
Thank You!

818 S. Hawthorne Avenue
Sioux Falls, South Dakota 57104-4537
(605) 336-0244 or (888) 4-SUMPTION
www.sumptionan...
IRS Regulations-Charities & Nonprofits Conflict of Interest
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IRS Regulations-Charities & Nonprofits Conflict of Interest

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Few nonprofit and charity leaders are familiar with the IRS regulations known as "intermediate sanctions." These rules govern conflicts of interest and compensation in nonprofit and charitable organizations, including churches.

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IRS Regulations-Charities & Nonprofits Conflict of Interest

  1. 1. The IRS and Nonprofit Leadership Accountability A Discussion of “Intermediate Sanctions”
  2. 2. Disclaimer Nothing in this presentation is intended to be legal or tax advice. Always consult with knowledgeable counsel on any issue relating to regulatory compliance. This presentation deals with Section 4958 of the Internal Revenue Code. Visit the IRS web site for more information: http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Intermediate-Sanctions
  3. 3. Honesty cartoon
  4. 4. Nonprofits in the News (usually for the wrong reasons!) • • • • • • • • • United Way of America – William Aramony September 11 charity American Red Cross – 9/11, etc. Jerry Sandusky/Penn State/The Second Mile “Pennies for Charity” and state AGs Katrina Nonprofit hospitals University endowments Local “scandal du jour”
  5. 5. IRS historical approach to exempt organization (EO) (nonprofit org.) enforcement The nonprofit organization risked loss of exempt recognition
  6. 6. Change in approach – rationale • Perception by IRS & Congress that nonprofits are getting away with abuses of their tax-exempt recognition • Traditional approach punishes the organization (and its beneficiaries) for bad acts of individuals • Individuals not held properly accountable for bad acts
  7. 7. Definition of “Intermediate Sanctions” The penalties imposed under Internal Revenue Code Section 4958 on persons involved in excess benefit transactions. Intermediate sanctions are an alternative to the revocation of an organization’s tax-exempt recognition when private individuals receive an excess benefit.
  8. 8. Excess benefit transactions – general “A transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the applicable tax-exempt organization exceeds the value of the consideration (including the performance of services) received for providing the benefit…. An excess benefit transaction also can occur when a disqualified person embezzles from the exempt organization.” Source: IRS Publication 557 http://www.irs.gov/publications/p557/ch05.html
  9. 9. Organizations covered under IS • 501(c)3 (charities) and 501(c)4 (social welfare) organizations Note: private foundations are not covered under Intermediate Sanctions regulations because they have similar regulations to follow already Churches are covered under Intermediate Sanctions even if they haven’t filed for exempt recognition
  10. 10. Conflict of interest cartoon
  11. 11. Conflicts of Interest • • • • Conflicts are almost inevitable A conflict is not necessarily illegal Conflicts must be disclosed in writing Conflicts must be managed through policy
  12. 12. Individuals covered under IS “disqualified persons” • • • • All voting board members and their family members All CEOs/Executive Directors and their family members All treasurers/CFOs and their family members Generally, donors of more than $5,000 if their contribution exceeds 2% of the nonprofit’s revenue for any period of time, and their family members • “Persons with a material financial interest in certain healthcare provider-sponsored organizations if a hospital that participates in the provider-sponsored organization is an applicable tax-exempt organization.” (And their family members) • Current and former included (five-year look-back period)
  13. 13. Penalties for excess benefit transactions First tier penalties • Individual benefiting – 25% excise tax on the amount of the excess benefit, plus "making the nonprofit whole" • Organization manager* – 10% excise tax on the amount of the excess benefit (up to $20,000 per transaction for tax years after August, 2006) Second tier penalties • Individual benefiting – additional 200% excise tax on the amount of the excess benefit
  14. 14. Conflict of interest cartoon 2
  15. 15. Excess benefit transactions -employees Compensation • Includes all salary, commissions, fringe benefits (except for certain exclusions), reimbursed expenses, etc. • “Highly compensated employee” - anyone with total compensation exceeding $150,000 in 2013, regardless of title/position Revenue-sharing transactions • Includes percentage compensation and compensation tied to nonprofit revenue (e.g., incentive pay)
  16. 16. "Safe harbor" -- "rebuttable presumption of reasonableness" Examples: • Board-led executive compensation studies on file • Multiple written bids for products, independent land appraisals, etc. • Consultation with legal counsel, accountants, etc. (Independent - NOT BOARD MEMBERS) Boards and managers who rely on independent counsel are generally safe from IS penalties
  17. 17. Demonstrate reasonableness through documentation – document, document, document! • Conflict of interest policy for organization IRS has an example – Appendix A of Form 1023/1024 http://www.irs.gov/pub/irs-pdf/i1023.pdf - pages 25-26 • Board minutes documenting action on transactions including conflicts, recusal of board members, etc. • Written board recruitment program including questionnaires documenting conflicts • Document managers’ conflicts – at least annual disclosure
  18. 18. Enforcement risks The IRS may, or may not, investigate your nonprofit’s practices, but others are often more likely to ask uncomfortable questions • Disgruntled/former employees/donors/clients • Media • “Public Advocates” • “Your 990 is showing!” http://www.guidestar.org
  19. 19. Additional resources • IRS web site: http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Intermediate-Sanctions • Federal Register (2002 final rule): http://www.gpo.gov/fdsys/pkg/FR-2002-01-23/pdf/02-985.pdf • The Law of Intermediate Sanctions: A Guide for Nonprofits Bruce R. Hopkins ISBN-10: 0471224022 / ISBN-13: 978-0471224020
  20. 20. Thank You! 818 S. Hawthorne Avenue Sioux Falls, South Dakota 57104-4537 (605) 336-0244 or (888) 4-SUMPTION www.sumptionandwyland.com
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