Intermediate Sanctions for Tax-Exempt Organizations: A Complete 2026 Guide

Overview of Intermediate Sanctions

Intermediate sanctions, as outlined in Section 4958 of the Internal Revenue Code, are excise taxes imposed by the IRS on certain transactions between applicable tax-exempt organizations and disqualified persons. These sanctions serve as a middle ground between imposing no penalty and revoking an organization's tax-exempt status entirely. The primary goal is to prevent private inurement and ensure that the assets of tax-exempt organizations are used for their intended charitable or exempt purposes, rather than for the private benefit of individuals who wield substantial influence over the organization [1].

This guide will delve into the specifics of intermediate sanctions, covering what they are, who qualifies as a disqualified person or an applicable tax-exempt organization, how these sanctions are claimed, relevant 2026 limits and amounts, common mistakes to avoid, and the pertinent IRS code references.

What Are Intermediate Sanctions?

Intermediate sanctions are excise taxes levied on excess benefit transactions. An excess benefit transaction occurs when an applicable tax-exempt organization provides an economic benefit to a disqualified person, and the value of that benefit exceeds the value of the consideration (including services) received by the organization in return [3].

These sanctions are designed to deter individuals with significant influence over tax-exempt organizations from engaging in transactions that unfairly benefit themselves or related parties at the expense of the organization's charitable mission. Unlike the more severe penalty of revoking an organization's tax-exempt status, intermediate sanctions allow the IRS to impose financial penalties on the individuals involved and, in some cases, on the organization managers, while preserving the organization's exempt status.

Who Qualifies: Disqualified Persons and Applicable Tax-Exempt Organizations

Understanding intermediate sanctions requires a clear grasp of two key definitions: disqualified persons and applicable tax-exempt organizations.

Disqualified Persons

A disqualified person is generally any individual who, at any time during the five-year period ending on the date of an excess benefit transaction, was in a position to exercise substantial influence over the affairs of an applicable tax-exempt organization [2]. This definition is broad and is not limited to just officers, directors, or trustees. It can include:

• Voting members of the governing body: Individuals with formal power to direct the organization.
• Presidents, CEOs, COOs, Treasurers, and CFOs: Key management personnel.
• Family members: Spouses, ancestors, children, grandchildren, great-grandchildren, and the spouses of children, grandchildren, and great-grandchildren of any disqualified person.
• 35% Controlled Entities: Any entity (corporation, partnership, or trust) in which disqualified persons own more than 35% of the voting power (for corporations), profits interest (for partnerships), or beneficial interest (for trusts) [2].

It's important to note that the ability to exercise substantial influence is the key, not necessarily the actual exercise of that influence. Donors and donor advisors to a donor-advised fund are also treated as disqualified persons with respect to transactions involving that fund [2].

Applicable Tax-Exempt Organizations

An applicable tax-exempt organization is defined as any organization that is, or was at any time during the five-year period ending on the date of the excess benefit transaction, exempt from tax under Section 501(c)(3) (charitable, religious, educational, scientific, etc.) or Section 501(c)(4) (social welfare organizations) of the Internal Revenue Code [4].

However, certain organizations are specifically excluded from being considered applicable tax-exempt organizations for the purpose of intermediate sanctions:

• Private foundations: These organizations are subject to their own set of excise taxes under Chapter 42 of the Internal Revenue Code.
• Governmental entities: Organizations that are not subject to taxation.
• Foreign organizations: Those exempt under Section 501(c)(3) or 501(c)(4) that receive substantially all of their support from sources outside the United States.
• Organizations with revoked exemption: Unless the revocation was due to private inurement or private benefit, and the lookback period still applies [4].

How to Claim It (or Rather, How it's Imposed and Corrected)

Intermediate sanctions are not claimed by organizations or individuals in the traditional sense of a tax deduction. Instead, they are excise taxes imposed by the IRS when an excess benefit transaction occurs. The process generally involves:

1. Identification of an Excess Benefit Transaction: The IRS identifies a transaction where a disqualified person receives an excessive economic benefit from an applicable tax-exempt organization.
2. Imposition of Excise Taxes:
   • First-tier tax: A tax equal to 25% of the excess benefit is imposed on the disqualified person [1].
   • Second-tier tax: If the excess benefit is not corrected within a taxable period, an additional tax of 200% of the excess benefit is imposed on the disqualified person [1].
   • Organization Manager Tax: An excise tax of 10% of the excess benefit (up to a maximum of $20,000 per transaction) may be imposed on an organization manager who knowingly participated in the excess benefit transaction [1].
3. Correction of the Excess Benefit: The disqualified person must correct the excess benefit transaction. This involves undoing the excess benefit to the extent possible and taking any additional measures necessary to place the organization in a financial position not worse than it would have been if the disqualified person had acted under the highest fiduciary standards [3]. Correction typically involves the disqualified person making a payment to the organization equal to the excess benefit plus interest [3].

These taxes are reported on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code [1].

2026 Limits, Amounts, and Rates

For the 2026 tax year, the core rates for intermediate sanctions remain consistent with the Internal Revenue Code Section 4958:

• First-tier tax on disqualified person: 25% of the excess benefit.
• Second-tier tax on disqualified person: 200% of the uncorrected excess benefit.
• Tax on organization managers: 10% of the excess benefit, capped at $20,000 per transaction. This tax is generally paid by the manager, not reimbursed by the organization.

It is crucial for organizations to stay updated on any potential inflation adjustments or legislative changes that might impact these figures. However, as of the current date, these percentages and the manager cap are the established limits under Section 4958.

Common Mistakes That Cost Taxpayers Money

Tax-exempt organizations and their disqualified persons often make several common mistakes that can lead to the imposition of intermediate sanctions:

1. Lack of Documentation for Compensation: Failing to adequately document the reasonableness of compensation paid to disqualified persons. All compensation arrangements should be approved in advance by an independent board or committee and supported by comparable data.
2. Unreasonable Compensation: Providing compensation or benefits to disqualified persons that exceed fair market value for services rendered. This is the most frequent cause of excess benefit transactions.
3. Inadequate Conflict of Interest Policies: Not having robust conflict of interest policies, or failing to enforce existing ones, leading to transactions that benefit insiders without proper oversight.
4. Ignoring the Lookback Period: Forgetting that an individual can be considered a disqualified person if they held a position of substantial influence at any point during the five-year period preceding the transaction.
5. Failure to Correct Timely: Not correcting an identified excess benefit transaction within the specified timeframe, which triggers the much higher 200% second-tier tax.
6. Lack of Education: Organization managers and board members not being fully aware of the rules surrounding intermediate sanctions and their personal liability.
7. Improper Valuation of Assets: When property is exchanged, using an incorrect or biased valuation method that results in an economic benefit to a disqualified person.

IRS Code Section Reference

The primary Internal Revenue Code section governing intermediate sanctions is Section 4958. This section details the excise taxes on excess benefit transactions between applicable tax-exempt organizations and disqualified persons.

Book a Consultation with Uncle Kam

Navigating the complexities of intermediate sanctions and ensuring compliance with IRS regulations can be challenging. Protect your tax-exempt organization and its leaders from costly penalties. Our experienced tax strategists and CPAs at Uncle Kam are here to provide expert guidance and support. Book a call today to discuss your specific situation and ensure your organization remains in good standing with the IRS. Book a Consultation

References

[1] Internal Revenue Service. "Intermediate sanctions." IRS.gov. Last Reviewed or Updated: 09-Oct-2025. https://www.irs.gov/charities-non-profits/charitable-organizations/intermediate-sanctions

[2] Internal Revenue Service. "Disqualified person - intermediate sanctions." IRS.gov. Last Reviewed or Updated: 30-Jan-2026. https://www.irs.gov/charities-non-profits/charitable-organizations/disqualified-person-intermediate-sanctions

[3] Internal Revenue Service. "Intermediate sanctions - Excess benefit transactions." IRS.gov. Last Reviewed or Updated: 20-Aug-2025. https://www.irs.gov/charities-non-profits/charitable-organizations/intermediate-sanctions-excess-benefit-transactions

[4] Internal Revenue Service. "Applicable tax-exempt organization." IRS.gov. Last Reviewed or Updated: 19-Oct-2025. https://www.irs.gov/charities-non-profits/charitable-organizations/applicable-tax-exempt-organization