The Internal Revenue Service issued proposed regulations clarifying the requirements for tax-exempt status and the imposition of intermediate sanctions. In the 20-page notice of proposed rulemaking, the IRS for the first time links the tax-exempt status of not-for-profit organizations to violations involving excess benefit transactions, explained Michael Peregrine, a healthcare tax attorney with the Chicago office of McDermott Will & Emery. Peregrine said that until now, the IRS had only gone after transaction participants, such as board members, officers or other disqualified persons who privately benefited from excess benefit transactions or approved them. "Now the service is putting hospitals and other tax-exempt organizations on notice that in certain situations, it would revoke their tax-exempt status for the actions of boards and officers committing those transactions."
The IRS said it would consider the size and scope of the organization's regular activities furthering its tax-exempt purposes before and after the transactions occurred; the size and scope of those transactions and whether that organization has previously committed excess benefit transactions; but most importantly, whether safeguards preventing future illegal transactions have been implemented and whether the organizations have corrected past transactions. Peregrine said the proposed regulations place a premium on internal tax compliance because organizations will fare better if they find excess benefit transactions and make a good-faith attempt to fix them before the IRS finds out. Parties have until Dec. 8 to submit comments and final published regulations will be published in the Federal Register sometime next year. -- by Mark Taylor