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Intermediate Sanctions Explained in Plain English

Intermediate what?  

An intermediate sanction is a fine that the IRS imposes when a “disqualified person” associated with a not-for-profit organization receives compensation or benefits that exceed the fair market value of the services they have provided to the organization. In plain English, it is a tax that the IRS can impose on the individual (and in some cases the not-for-profit organization) when an excess benefit is determined to have been paid or given.

Am I a disqualified person? 

An intermediate sanction is a fine that the IRS imposes when a “disqualified person” associated with a not-for-profit organization receives compensation or benefits that exceed the fair market value of the services they have provided to the organization. In plain English, it is a tax that the IRS can impose on the individual (and in some cases the not-for-profit organization) when an excess benefit is determined to have been paid or given.


The IRS has issued specific definitions of those who are classified as disqualified persons.  Some of those who fall under the definition might surprise you. A disqualified person has the power to exercise substantial influence over the activities of the organization, at any point in the previous five years.  Examples of someone who would fit these criteria are the chief executive officer, president, chief operating officer, chief financial officer or treasurer. Board members who have voting rights are also considered to be disqualified persons. Anyone else who has the ultimate responsibility for implementing the decisions of the governing body, supervising the management or administrative function of the organization, operation of the organization as a whole or managing the finances would also be considered a disqualified person. The most surprising individual who is considered a disqualified person is any family member of any of the individuals mentioned above.

How much will this cost you?

The first tier of tax is assessed at 25% of the excess benefit and is imposed on the individual disqualified person. The not-for-profit organization must amend their Form 990 to include the excess benefit as compensation to the individual.  A Schedule O disclosure should be added to include circumstances behind the amendment.  If the IRS determines that the organization’s management knowingly participated in the excess benefit and willingly did not disclose it, then the not-for-profit is assessed a 10% tax on the excess benefit. If corrective measures are not taken within the required timeframe by the not-for-profit, then a 200% tax can be imposed on the disqualified person.

Excess Benefits? 

 In plain English, an excess benefit is when you pay a “related” individual more than you would pay “unrelated” individual for the same service or good. A “related” individual is a disqualified person as discussed above. Some examples of things that could be considered excess benefits if not documented and accounted for correctly are incentive plans, supplemental retirement plans, deferred compensation plans, severance payments, below market loans, club dues, spousal travel, and personal use of a donated vehicle.

Oh no! We may have one of these! Are we in trouble? 

The IRS provides guidelines for not-for-profits on how to properly document the “reasonableness” of the compensation and benefits being paid to an individual. There are several steps that the not-for-profit should take. The benefit/transaction needs to be reviewed and approved by an independent board or committee BEFORE it is paid to the individual. The board that reviews and approves the benefit should be using comparable data from other similar organization. The board or committee should also document their approval in minutes or a board resolution or some other written fashion. Some other steps that the not-for-profit should have in place include compensation documented properly in an employment agreement and any possible excess benefit should be included as compensation in the individual’s W-2. Let’s be honest. All of these steps are referred to as the “rebuttable presumption of reasonableness” by the IRS.

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