What a Difference Knowledge Makes: A Guide to Intermediate Sanctions for Tax-Exempt Organizations and Their Leaders

Edited by Steven B. Jarett, MPA, CPA
Published by Accountants for the Public Interest, $25
Reviewed by Daniel P. Tinkelman, CPA, assistant professor of accounting, Lubin School of Business, Pace University

This concise monograph is recommended reading for all managers, directors, and advisors of nonprofit organizations. It explains in clear and direct language the IRC provisions and related IRS regulations designed to prevent self-interested dealings by managers and directors of nonprofit organizations. Failure to understand these rules can cause managers of even the most ethical organization to incur severe penalties. However, with proper planning and documentation, most organizations should not find the rules burdensome.

For example, IRC section 4958, enacted in 1996, imposes punitive taxes on certain types of transactions, called “excess benefit” transactions, involving organizations exempt from tax under IRC sections 501(c)(3) or 501(c)(4). Excess benefit transactions include those in which the organization gives some undue economic benefit to persons that exercise significant influence over the organization, called “disqualified persons” in the statute. Excess benefit transactions with disqualified persons include officers’ compensation and purchases of goods or services from employees, officers, or directors not conducted at arm’s length. If organizations do not follow the specified procedures for documenting that their transactions are conducted at arm’s length and do not ensure that no conflicts of interest exist in the approval process, both the recipient of the benefit and the managers of the organization could become liable for significant sanctions. The law imposes a 25% tax on the person receiving the excess benefits, plus an additional 200% tax if the money is not repaid to the organization promptly. The law also imposes a 10% tax on managers—which can include officers, directors, or trustees—that knowingly participated in paying the excess benefits, limited to $10,000 on a single transaction.

The first three sections of the book explain the key provisions of the rules in nontechnical language that nonaccountants can easily understand. The authors also give considerable attention to the procedures for organizations to follow in approving top management compensation as well as all other transactions with employees, directors, and officers. The book gives several case studies to demonstrate to nonaccountants the importance of maintaining adequate documentation and control procedures. Sections 4 and 5, with technical references and background information, will be of interest primarily to accountants seeking a deeper understanding of the subject.

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