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About Intermediate Sanctions

January 2003

Note: The following discussion is provided for informational purposes only and is not intended to serve as legal or tax advice. For specific information about excise taxes on excess benefit transactions ("intermediate sanctions"), consult your attorney or tax adviser.

Intermediate sanctions, known formally as "excise taxes on excess benefit transactions," are fines that the Internal Revenue Service imposes when particular individuals associated with a tax-exempt organization receive compensation or benefits that exceed the value of services, goods, or donations they have provided the organization.

Intermediate sanctions fall under Section 4958 of the Internal Revenue Code and can be levied on excess benefit transactions that occurred on or after September 14, 1995.


Congress created intermediate sanctions on July 30, 1996, as part of the Taxpayer Bill of Rights 2. Before then, the IRS had only two ways to respond to excess benefit transactions: (1) ignore the transgression or (2) revoke the nonprofit's tax-exempt status.

In many cases, revoking an organization's nonprofit status was seen as too severe a penalty, partially because it punished innocent parties in the organization and the people the nonprofit served. Ignoring excess benefits transactions was equally unsatisfactory, however. Intermediate sanctions fall between the two extremes and penalize the offenders rather than the entire organization and its beneficiaries.

On January 23, 2002, the Treasury Department issued temporary regulations relating to intermediate sanctions.

Individuals Affected by Intermediate Sanctions

Only persons who are "in a position to exercise substantial influence over the affairs of" a 501(c)(3) or 501(c)(4) nonprofit organization and their family members are subject to intermediate sanctions. The law terms such individuals "disqualified persons." They include, but are not limited to:

  • A nonprofit organization's president, chief executive officer, chief operating officer, treasurer, and chief financial officer
  • Voting members of a nonprofit's governing body
  • Persons with more than 35 percent of a nonprofit organization's combined voting power, profits, or beneficial interests
  • Substantial contributors
  • A disqualified person's spouse
  • A disqualified person's siblings, ancestors, children, grandchildren, great-grandchildren, and their spouses
Organization managers who "knowingly, willfully, and without reasonable cause" participate in an excess benefit transaction can also be subject to intermediate sanctions.

Amount of Penalty

For disqualified persons, the excise tax for each excess benefit transaction is 25 percent of the amount over the true value of the services or item. An additional 200 percent can be charged if the excess benefit is not corrected by a certain date.

Organization managers who "knowingly, willfully, and without reasonable cause" participate in an excess benefit transaction are liable for 10 percent of the excess, not to exceed $10,000 per transaction.

Rebuttable Presumption

The regulations define three criteria that can be used to establish that a transaction was not an excess benefit transaction:

  1. The transaction was approved in advance by an authorized body of the nonprofit organization composed of individuals who do not have a conflict of interest
  2. The authorized body obtained and relied upon appropriate data, such as a compensation report or proof of fair market value, as to comparability before making its decision
  3. The authorized body adequately documented the basis for its determination at the time it made its decision.
If these criteria are met, it becomes the IRS's responsibility to prove that an excess benefit transaction was made.

For More Information

  • Steven T. Miller, director of Exempt Organizations at the IRS, has written an articles about the intermediate sanction regulations. It is available on the IRS Web site.
  • A thorough discussion about intermediate sanctions, including examples of what is and is not an excess benefit transaction and who is and is not considered a disqualified person, precedes the final regulations in the Federal Register (vol. 67, no. 15 [January 23, 2003]: 3076-3099).


  • Taxpayer Bill of Rights 2. U.S. Statutes at Large 110 (1452-1481.)
  • U.S. Department of the Treasury, Internal Revenue Service. 26 CFR Parts 53, 301 and 602: Excise Taxes on Excess Benefit Transactions.  Federal Register 67, no. 15 (January 23, 2003): 3076-3099.
Suzanne E. Coffman
© 2003, Philanthropic Research, Inc.