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.

1. The IRS and
Nonprofit Leadership
Accountability
A Discussion of “Intermediate Sanctions”

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

4. Honesty cartoon

5. Nonprofits in the News
(usually for the wrong reasons!)
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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”

6. IRS historical approach to exempt
organization (EO) (nonprofit org.)
enforcement
The nonprofit
organization
risked loss of
exempt
recognition

7. 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

8. 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.

9. 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

10. 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

11. Conflict of interest cartoon

12. Conflicts of Interest
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Conflicts are almost inevitable
A conflict is not necessarily illegal
Conflicts must be disclosed in writing
Conflicts must be managed through policy

13. Individuals covered under IS
“disqualified persons”
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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)

14. 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

15. Conflict of interest cartoon 2

16. 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)

17. "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

18. 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

19. 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

20. 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

21. Thank You!
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