If you serve a nonprofit organization as a senior officer, a Board member, or a member of the Compensation Committee, you’re subject to a set of IRS penalties called “Intermediate Sanctions.”  Essentially, the IRS has issued regulations, with significant penalty taxes for noncompliance, designed to ensure that (a) cash payments, transfers of property, and fringe benefits that flow from a nonprofit to an individual are transferred as compensation, and (b) the value of the compensation is reasonable in relation to the person’s job. 

The penalties fall primarily on the person receiving the excess compensation, with smaller amounts that can be assessed on the members of the board or committee who approved the compensation.  The regulations are called “Intermediate” because they give the IRS a middle ground between doing nothing and revoking the organization’s tax-exempt status – the first option doesn’t accomplish anything, while revoking a tax exemption can hurt the people or organizations being served or funded by the not for profit organization. 

Much of our work involves assisting our clients in complying with the Intermediate Sanctions regulations.  This includes:

Identifying the positions covered by Intermediate Sanctions.

Collecting and valuing all elements of compensation for each person.

Assessing the reasonableness of each person’s compensation.

Ensuring compliance with the documentation and deadlines required by the regulations.

In subsequent posts, we’ll examine the key elements of the regulations and steps for staying in compliance.