But what takes place when the IRS determines that compensation is unreasonable since it does not meet the foregoing requirements? Negative points. Definitely negative points.
The IRS imposes extreme sanctions on persons of influence (officers and directors) who get excessive financial positive aspects from a nonprofit organization. The individual is definitely the target right here; the nonprofit organization itself is not ordinarily punished - unless not surprisingly, the indiscretion is so flagrant that a revocation on the organization’s tax-exempt status is warranted. Okay, so what’s unreasonable? The IRS has determined that beneath specific circumstances, the following things is usually deemed unreasonable
compensation:
- Leasing of property owned by an executive to the nonprofit in return for excessive rent
- Loans made by a nonprofit to an executive
- Payment by the nonprofit of expenses for a for-profit corporation owned by the executive
- Payment by the nonprofit of personal expenses of members of an executive’s family
- Personal use of vehicles (for example, airplanes)
- Receipt of royalties from a book published by the nonprofit organization
- Reimbursements of personal expenses
The IRS labels all of those transactions as excess advantage transactions. An excess advantage transaction is one particular exactly where an financial advantage is offered by a nonprofit to an executive, exactly where the value of that advantage exceeds the value received by the nonprofit for the advantage from the executive. Or, to become blunt, an excess advantage transaction is when the IRS believes that the executive’s
work is getting substantially overvalued.
The IRS tends to make confident that excess advantage transactions are pricey and anything to become avoided by imposing the following penalties:
- Initial 25-percent penalty: The IRS will send the executive a bill equal to 25 percent on the excess advantage for every single excess advantage transaction.
- A 200-percent penalty for all those who persist: In the event the excess advantage transaction is not corrected inside a given time period, an more excise tax equal to a 200-percent penalty may perhaps be imposed. Ouch!
- Doubling the discomfort beneath the Pension Protection Act of 2006: To produce matters much more really serious, the Pension Protection Act of 2006 doubles (yes, doubles) the penalties applicable to excess advantage transactions. For extra on the Pension Protection Act, see the sidebar, “The sting ofthe Pension Protection Act.”
