Intermediate Sanctions Under 4958: An Overview of the Proposed Regulaitons

Last year, new rules were proposed that would impose taxes on people in leadership positions at nonprofit organizations who receive too much money from the organization. These rules have been criticized for making it more complicated for anyone who works with a nonprofit to understand how they might be affected. For a long time, the government has had rules to stop people from using nonprofit organizations for their own personal gain. Until recently, the main way the government enforced these rules was by taking away the organization’s tax-exempt status. But this was seen as too harsh of a punishment in some cases, especially when the organization itself wasn’t doing anything wrong. In 1996, Congress passed a law that holds individuals responsible for paying taxes if they receive too much money from tax-exempt organizations. The law applies to nonprofit organizations like charities and social welfare groups. It also applies to people who are closely involved with these organizations. The IRS has released regulations to help explain who counts as a “disqualified person” and how organizations can show that certain transactions are not excessive. If you’re connected to a nonprofit and get too much money from them, you might have to pay taxes on it. The people in charge of running a nonprofit organization, like the directors, trustees, president, CEO, COO, treasurer, and CFO, have a lot of influence over how the organization operates. This is true even if their official job titles are different. For example, someone who is in charge of the organization’s money and can sign checks is considered to be a treasurer or CFO, even if they don’t have that title. If an employee of a charity or nonprofit organization receives less than $80,000 in total economic benefits, they are not considered to have a lot of influence over the organization. However, other people can be disqualified based on their level of control or involvement with the organization. Factors like being a founder or substantial contributor, receiving compensation based on the organization’s activities, or having control over the organization’s budget or employees can show that a person has substantial influence. On the other hand, taking a vow of poverty, being an independent contractor like a lawyer or accountant, or receiving preferential treatment as a donor may show that a person is not disqualified. Managers of certain parts of an organization can also be considered to have substantial influence over the whole organization. Additionally, family members and certain business interests of a disqualified person are also considered disqualified. An excess benefit transaction is when an exempt organization gives a disqualified person too much money or benefits in a financial transaction. This could include paying a salary or selling property for more than it’s worth. The most common excessive transaction is paying too much in compensation. Compensation should be reasonable and similar to what other companies would pay for the same work. This includes all forms of cash and noncash payments, as well as benefits like insurance and retirement plans. If a nonprofit organization gives someone a benefit, like paying for their expenses or giving them a share of the organization’s income, it could be considered excessive if it’s not reasonable. This could get the organization and the person in trouble with the IRS. However, there are some exceptions, like if the benefit is for a specific purpose, like attending meetings, or if it’s provided to a lot of people for a small fee. If the benefit is meant as payment for work, it has to be reported as income on tax forms. There are also special rules for sharing revenue with people connected to the organization. If the benefit isn’t proportional to what the person is doing for the organization, it could be a problem. The proposed regulations have a way for a non-profit organization’s board to assume that a financial transaction doesn’t result in excessive payment, as long as certain conditions are met. This includes getting approval from a group of unbiased members, comparing the transaction to similar ones, and documenting the decision. If a disqualified person does receive excessive payment, they will owe a 25% excise tax on the extra amount. If more than one person is responsible, they all have to pay the tax together. If a manager of a charity organization breaks the rules by getting an excessive benefit, they could be in trouble. They might have to pay extra taxes of 10 percent of the excess benefit, up to $10,000 per incident. This applies to directors, officers, and trustees of the organization. They could be on the hook for both the 25 percent and 10 percent taxes. To be held responsible, the manager has to know about the excessive benefit and not do anything to stop it. If they try to stop it, they won’t be held responsible. If the managers of a nonprofit organization get a legal opinion from their lawyer that a transaction won’t break the rules, they won’t have to pay extra taxes, even if it turns out they were wrong. But if they don’t fix the problem in time, they’ll have to pay a lot of extra taxes. There’s a court case that might change the rules, so we’ll have to wait and see how things turn out in the future. The IRS took away an organization’s tax-exempt status because they believed the organization was giving money to a private shareholder. However, the court reversed this decision, saying that the private shareholder rule only applies to people inside the organization. The court also criticized the IRS for not having clear rules for these cases. After the court decision, the IRS said they would change their rules and now all decisions about taxes for these cases must be approved by the national office. The proposed regulations for exempt organizations may be relied upon until final regulations are issued. Organizations will need to implement strict policies to avoid sanctions and keep thorough records of their financial transactions and decisions. This will require extra resources and will become a regular part of their operations.

Source: https://www.floridabar.org/the-florida-bar-journal/intermediate-sanctions-under-4958-an-overview-of-the-proposed-regulaitons/