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IRS INTERMEDIATE SANCTIONS
Discussion
The IRS “Intermediate Sanctions” regulations (January 23, 2002 Federal Register, page 3076) allow the IRS to levy excise taxes on nonprofit organizations and their managers for transactions that are found to provide an “excess benefit” or private inurement
for nonprofit insiders, generally members of the board and key or influential
employees. These regulations provide the IRS with punitive steps it can take
when it finds that a nonprofit has failed to take appropriate steps to manage
conflicts of interest and as a result, certain individuals received a personal
benefit.
The law imposes a 25% excise tax on a disqualified person who engages in an excess benefit transactions and the disqualified person must return the excess benefit to the organization. If the individual refuses to cooperate, the IRS can assess an additional 200% tax if the transaction is not corrected once the 25% tax is imposed. In addition, board members who knowingly and willfully approve such a transaction are jointly and severally liable for a 10% tax limited to $10,000 per transaction. Disclosure of names and amounts of individuals penalized by the IRS for private inurement
must be reported on the organization’s Form 990, which is openly disclosed to
the public. D&O liability insurance does not cover taxes and penalties.
Guidance on the intermediate sanction regulations and how to avoid problems can be found in two articles posted on the IRS web site:
http://www.irs.gov/pub/irs-tege/m4958art.pdf
http://www.irs.gov/pub/irs-tege/m4958a2.pdf
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