Intermediate sanctions vs. substantial influence

The chief determining factor in deciding if an individual is a disqualified person under the Immediate Sanctions heading of the Internal Revenue Service (IRS) is that a person is in a position to exercise “substantial influence” over the affairs of the organization.

During the AICPA Not-for-Profit Industry Conference, Jeffrey D. Frank of Deloitte Tax LLP discussed aspects of IRS concerns regarding intermediate sanctions, disqualified persons and substantial influence. Frank said that the following are substantial influence factors:

  • The person founded the organization;
  • The person is a substantial contributor, based on contributions for the past five years;
  • Compensation is primarily based on revenues derived from the activities the person controls;
  • Authority to control or determine a substantial portion of the organization’s capital expenditures, operating budget or compensation for employees; and,
  • The person manages a discrete segment or activity of the organization.

The following are usually considered to have a lack of substantial influence:

  • Independent contractor, solely providing professional advice (no decision-making authority) for transactions from which the contractor will not economically benefit;
  • A direct supervisor is not a disqualified person;
  • A person who has taken a vow of poverty (e.g., in religious institutions);
  • Preferential treatment received based on donations also offered to others making comparable widely solicited donations.