IRS Regulations-Charities & Nonprofits Conflict of Interest
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Transcript of IRS Regulations-Charities & Nonprofits Conflict of Interest
The IRS and Nonprofit Leadership
Accountability
A Discussion of “Intermediate Sanctions”
Disclaimer
Nothing in this presentation is intended to be legal or tax advice. Always consult with
knowledgeable counsel on any issue relating to regulatory compliance.
This presentation deals with Section 4958 of the Internal Revenue Code. Visit the IRS web site
for more information:http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Intermediate-Sanctions
Honesty cartoon
Nonprofits in the News(usually for the wrong reasons!)
• United Way of America – William Aramony• September 11 charity• American Red Cross – 9/11, etc.• Jerry Sandusky/Penn State/The Second Mile• “Pennies for Charity” and state AGs• Katrina• Nonprofit hospitals• University endowments• Local “scandal du jour”
IRS historical approach to exempt organization (EO) (nonprofit org.)
enforcement
The nonprofit organization risked loss of
exempt recognition
Change in approach – rationale
• Perception by IRS & Congress that nonprofits are getting away with abuses of their tax-exempt recognition
• Traditional approach punishes the organization (and its beneficiaries) for bad acts of individuals
• Individuals not held properly accountable for bad acts
Definition of “Intermediate Sanctions”
The penalties imposed under Internal Revenue Code Section 4958 on persons involved in excess benefit transactions.
Intermediate sanctions are an alternative to the revocation of an
organization’s tax-exempt recognition when private individuals receive an
excess benefit.
Excess benefit transactions – general
“A transaction in which an economic benefit is provided by an applicable tax-exempt organization,
directly or indirectly, to or for the use of any disqualified person, and the value of the economic
benefit provided by the applicable tax-exempt organization exceeds the value of the consideration (including the performance of services) received for
providing the benefit…. An excess benefit transaction also can occur when a disqualified person embezzles
from the exempt organization.”Source: IRS Publication 557http://www.irs.gov/publications/p557/ch05.html
Organizations covered under IS
• 501(c)3 (charities) and 501(c)4 (social welfare) organizations
Note: private foundations are not covered under Intermediate Sanctions regulations because they have similar regulations to follow already
Churches are covered under Intermediate Sanctions even if they haven’t filed for exempt
recognition
Conflict of interest cartoon
Conflicts of Interest
• Conflicts are almost inevitable• A conflict is not necessarily illegal• Conflicts must be disclosed in writing• Conflicts must be managed through policy
Individuals covered under IS“disqualified persons”
• All voting board members and their family members• All CEOs/Executive Directors and their family members• All treasurers/CFOs and their family members• Generally, donors of more than $5,000 if their
contribution exceeds 2% of the nonprofit’s revenue for any period of time, and their family members
• “Persons with a material financial interest in certain healthcare provider-sponsored organizations if a hospital that participates in the provider-sponsored organization is an applicable tax-exempt organization.” (And their family members)
• Current and former included (five-year look-back period)
Penalties for excess benefit transactions
First tier penalties• Individual benefiting – 25% excise tax on the
amount of the excess benefit, plus "making the nonprofit whole"
• Organization manager* – 10% excise tax on the amount of the excess benefit (up to $20,000 per transaction for tax years after August, 2006)
Second tier penalties• Individual benefiting – additional 200% excise
tax on the amount of the excess benefit
Conflict of interest cartoon 2
Excess benefit transactions -- employees
Compensation• Includes all salary, commissions, fringe benefits (except
for certain exclusions), reimbursed expenses, etc.• “Highly compensated employee” - anyone with total
compensation exceeding $150,000 in 2013, regardless of title/position
Revenue-sharing transactions• Includes percentage compensation and compensation
tied to nonprofit revenue (e.g., incentive pay)
"Safe harbor" -- "rebuttable presumption of reasonableness"Examples:• Board-led executive compensation studies on file• Multiple written bids for products, independent land
appraisals, etc. • Consultation with legal counsel, accountants, etc.
(Independent - NOT BOARD MEMBERS)
Boards and managers who rely on independent counsel are generally safe from IS penalties
Demonstrate reasonableness through documentation – document, document,
document!• Conflict of interest policy for organization
IRS has an example – Appendix A of Form 1023/1024
http://www.irs.gov/pub/irs-pdf/i1023.pdf - pages 25-26
• Board minutes documenting action on transactions including conflicts, recusal of board members, etc.
• Written board recruitment program including questionnaires documenting conflicts
• Document managers’ conflicts – at least annual disclosure
Enforcement risks
• Disgruntled/former employees/donors/clients
• Media• “Public Advocates”• “Your 990 is showing!”
http://www.guidestar.org
The IRS may, or may not, investigate your nonprofit’s practices, but others are often more likely to ask uncomfortable questions
Additional resources
• IRS web site:http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Intermediate-Sanctions
• Federal Register (2002 final rule):http://www.gpo.gov/fdsys/pkg/FR-2002-01-23/pdf/02-985.pdf
• The Law of Intermediate Sanctions: A Guide for Nonprofits
Bruce R. HopkinsISBN-10: 0471224022 / ISBN-13: 978-0471224020
Thank You!
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