by Kimberly A. Robinson, CPA, Partner
What is an excess benefit transaction?
This is a term used by the Internal Revenue Service (IRS) to describe a transaction between an applicable tax-exempt organization and individuals of authority in the tax-exempt organization where the organization pays more than they would in a regular arm’s length transaction.
To be more specific, the IRS names the individuals of authority in these cases as “disqualified persons.” They are defined as those persons who are in a position to exercise substantial influence over the affairs of a tax-exempt organization. Individuals of authority could include voting members of the governing body, any individual who has the ultimate responsibility for implementing the decisions of the governing body, or any individual who supervises the management, administration, or operation of the tax-exempt organization. In addition, the IRS definition extends to include the family members of the individuals of authority or any organizations in which individuals of authority (or their family members) have a major interest. (These definitions can be found in the Code of Federal Regulation Title 26 Section 53.4958-3 and Title 26 Section 53.4958-4.)
How can our organization avoid excess benefit transactions?
Your best bet to ensure that this type of transaction does not occur is to obtain at least 3 quotes prior to engaging in services provided by any disqualified person. Defensive recordkeeping is truly an organization’s best friend and will assist you if a transaction is called into question by the IRS.
What will happen if an excess benefit transaction occurs?
If the IRS determines that an excess benefit transaction has occurred, there are several potential consequences. The IRS may require the disqualified person who received the benefit to repay the “excess” to the organization. Your organization may also be required to file a corrected 990 and/or make a disclosure to your auditors for inclusion in the audited financial statements. The goal of these IRS penalties is generally to punish those responsible for creating private inurement without punishing the organization as a whole.
