Article summary. The IRS has issued long—awaited regulations addressing "intermediate sanctions." Intermediate sanctions refer to excise taxes that the IRS can assess against any officer or director of a tax—exempt organization (including churches and other religious organizations) who receives excessive compensation. It is very important for clergy and church board members to understand intermediate sanctions in order to avoid the substantial excise taxes that the IRS can impose upon the recipients of excessive compensation (and the board members who approved it). This article will review the background of these new sanctions, summarize the new regulations, and address the impact of intermediate sanctions on church leaders.
The Taxpayer Bill of Rights 2 (TBOR2), enacted by Congress in 1996, contained a provision allowing the IRS to assess "intermediate sanctions" (an excise tax) against "disqualified persons" in lieu of outright revocation of an organization's exempt status. The intermediate sanctions may be assessed only in cases of "excess benefit transactions," meaning one or more transactions that provide unreasonable compensation to an officer or director of the exempt organization. An excess benefit transaction is defined as:
any transaction in which an economic benefit is provided to a "disqualified person" (someone in a position to exercise substantial influence over the affairs of the organization) if the value of the benefit exceeds the value of the services provided by the disqualified person, or