IRS Targeting Fringe Benefits for Intermediate Sanctions

By R. Michael Sorrells, CPA

According to an IRS tax-exempt official at a recent nonprofit conference, fringe benefits are the most common area in which the IRS is imposing intermediate sanctions under IRC Section 4958. This code section, which applies to 501(c)(3) public charities and 501(c)(4) social welfare organizations, can lead to very expensive excise taxes for organization executives and even members of the governing body in certain situations.

Two Ways Fringe Benefits Can Lead to Intermediate Sanctions

First, when determining if compensation is reasonable and establishing the “rebuttable presumption of reasonableness” under the IRC Section 4858 regulations, an organization must take into consideration the value of fringe benefits when calculating the total value of executive compensation. When fringe benefits are not added into the total compensation, then compensation may exceed a reasonable level and the rebuttable presumption may not be legitimate because it is not truly based on the total compensation package.

Secondly, the IRS can impose intermediate sanctions on “automatic” excess benefits. Automatic excess benefits are any compensation amounts which the executive receives that are not reported on either the organization’s 990, the employee’s W-2 or otherwise documented as approved compensation, i.e., in board minutes or the individual’s employment contract. Thus, it is vitally important to account for and properly report all fringe benefits.
The IRS is currently conducting a three-year examination program in the area of employment taxes with some 500 exempt organizations being examined. Proper recording of fringe benefits is certainly going to be an area of interest in these examinations and automatic excess benefits could clearly be a target for improper recording.

Also, organizations should be very careful about their accountable expense reimbursement plans. Lack of proper documentation (receipts and expense reports) can cause a reimbursement to be considered a taxable fringe benefit. Periodic board reviews of CEO expense reimbursements can help assure that both expenses and reimbursements are appropriate.