The Nonprofit FAQ

'Excess benefit transactions' and 990s

"Intermediate sanctions" were enacted in 1998 to give the IRS tools to use against individuals who abuse tax-exempt status for personal gain. There are other items in the FAQ that discuss intermediate sanctions more generally (see http://www.nonpriofits.org/npofaq/18/13.html). Stephen C. Nill wrote to CharityLaw (a service of CharityChannel.com) on January 25, 2001: A nonprofit organization has brought suit to recover certain funds that were transferred to a disqualified person without adequate consideration. That matter will be in trial in a state court shortly. Defendants are the person who received the excess benefit and the board members who approved it. We're now preparing the Form 990 covering the period in which the excess benefit transaction occurred. My thought in completing the 990 is to be extremely forthcoming about the excess benefit transaction, beyond what might be minimally necessary. The objective is to encourage the IRS to go after the person who received the excess benefit transaction. Perhaps, I've thought to myself, the 25% and, failing that, the 200% excise tax (penalties) would be sufficient incentive for the person to return the funds to the organization as a means of avoiding at least the 200% excise tax (which would take this into the seven figures, btw). I realize, and the organization realizes, that an excess benefit transaction in theory gives the IRS the power to revoke exemption. However, I view that as a very remote risk, especially given the bona fide nature of the organization and the efforts the organization is going through to restore its funds. In any case, the 990 requires the disclosure, so like it or not, the IRS will be apprised. Has anyone here dealt with a situation like this? Have you actually sought out the enforcement machinery of the IRS on behalf of your nonprofit organization or client within the context of the Intermediate Sanctions rules? What steps would you recommend in contacting the Service, beyond the 990 disclosures? Carolyn Klamp responded: One of my clients dealt with a similar issue last summer. While I do not yet know what will come of the disclosure, I can report that the IRS national office was extremely helpful in providing advice. My client had considered asking for a private letter ruling (to help protect the organization from a threatened defamation suit by the disqualified person) in advance of filing the disclosure. The national office told me that it would be at least a year before any intermediate sanctions related PLR could be issued. They offered to give me some informal information about how the service might approach the case. Subsequently, I spent quite a bit of time on the phone with an intermediate sanctions specialist who gave me specific advice about how the service might view the transactions. In addition to including the relevant information on the client's next 990, I also sent the national office a more comprehensive packet of information (with details of the transactions and information about the disqualified person) My client implemented a number of new policies to help ensure that a similar problem would not occur in the future; this information was also included in the packet. Lisa Runquist added: "In any case, the 990 requires the disclosure, so like it or not, the IRS will be apprised." So you might as well tell them what you know now, rather than after they ask the questions. Of course, you might keep in mind that if you file this as part of the 990, then it stays with the 990 and will have to be disclosed to anyone who wants it. If this is not your desire, you might want to make the minimum disclosure on the 990, and have a separate filing with the IRS providing all of the gory details. "They offered to give me some informal information about how the service might approach the case. Subsequently, I spent quite a bit of time on the phone with an intermediate sanctions specialist who gave me specific advice about how the service might view the transactions." One item to note for anyone thinking of doing this, although talking to an IRS specialist may be helpful, if it is not in writing, it is not binding on the service. Therefore, if you are going to actually rely upon something that the IRS agent said, get it in writing. Otherwise, just take it as generic advice that may be reversed at any time. For an update on IRS initiatives about Intermediate Sanctions starting in 2004, see ttp://www.nonprofits.org/npofaq/18/13.html Posted 3/5/01 -- PB