Rules Affecting 501(c)(3) and (c)(4) Exempt Organizations
The Taxpayer Bill of Rights 2 ("TBOR2"), enacted in 1996, brought new rules to exempt organizations, including
- stringent new records-inspection requirements,
- taxes on "excess benefits transactions", and
- a clear prohibition of private inurement to social welfare organization shareholders.
Inspection Requirements:
Under the old rules, exempt organizations were required to allow individuals to inspect copies of Form 990. TBOR2 requires the organization to provide copies of Form 990, the organization's application for exemption, and supporting papers and related IRS correspondence, to anyone who requests them.
If the request is made in person, the copies must be provided immediately; if request is made in writing, you have 30 days to respond.
Penalties for noncompliance are $20 per day up to $10,000. Large organizations (over $1 million in annual receipts) face higher penalties, $100 per day up to $50,000.
(Although these rules are not effective until IRS issues related regulations, you should prepare now so you are ready when the rules hit).
Excess Benefits:
Penalties apply when organizations exempt under 501(c)(3) or (c)(4) engage in transactions with "disqualified persons" which are "excess benefit transactions". You are "disqualified" if you were in a position to exercise substantial influence over the affairs of the organization at any time in the last 5 years.
Excess benefit means you got paid more than your goods or services were worth.
The disqualified person pays a tax of 25% of the excess benefit amount, and another tax of 100% of the benefit amount if the transaction is not corrected timely.
In addition, any officer, director, or trustee who knowingly participated in an excess benefits transaction is also liable for a tax of the lesser of $10,000 or 10% of the excess benefit amount.
Private Inurement:
These rules, which previously prohibited private inurement from 501(c)(3) organizations, are now extended to include social welfare organizations exempt under 501(c)(4).
