Intermediate Sanctions: Understanding the IRS Rules for Excessive Benefits

Under the Internal Revenue Service (IRS) rules for intermediate sanctions, excessive benefit transactions with persons in a position of power within a §501(c)(3) organization, such as Davis, are subjected to certain punitive measures and penalties. Since Davis has not reimbursed the excess benefits amounting to $79,000 before the due date of the first-level tax, the IRS imposes a tax.

Initial Tax:

The initial tax on the disqualified person, Davis, is 25% of the benefit value, which in this case would be $19,750. This tax serves as a penalty for the inappropriate receipt of excessive benefits that should have been allocated for charitable purposes within the organization.

Second Level Tax:

If Davis does not correct the transaction within the taxable period, a second level tax of 200% can be enacted, amounting to $158,000. This severe penalty is meant to deter individuals from exploiting their positions within charitable entities for personal gain at the expense of the organization's mission.

Additional Penalty:

Furthermore, a tax manager who knowingly participated in the transaction can also be penalized with a tax of 10% of the benefit value up to a maximum of $20,000. This provision aims to hold accountable those who facilitate or enable such transactions within the organizational structure.

It is vital for individuals in leadership roles within charitable organizations to adhere to ethical standards and avoid conflicts of interest that could harm the organization's reputation and integrity. The IRS rules for intermediate sanctions serve as a safeguard against abuse of power and ensure that charitable assets are used for their intended purpose of benefiting the community.