Exempt Organizations Technical Guide›TG 62: Excise Taxes on Taxable Expenditures – IRC Section 4945›Table of Contents
B. Section 4945 – Second Tier Tax and Penalties Example
Publication 5590 — Exempt Organizations Technical Guide TG 62: Excise Taxes on Taxable Expenditures under IRC 4945 · 2026-10-03 edition · updated 2026-10-04 · United States
(1) Continuing with the example above, Agent Davis, prior to issuing a 30-day letter
with the enclosed reports, issues a Thorne letter to Foundation Manager Charlie, who refuses to make correction. DP Charlie disputes that he is liable under Section 4945(a)(2) and plans to file a formal protest to Appeals upon receipt of Agent Davis’ report, issued on January 2, 2013. See the Thorne Letter example below for sample language used in a Thorne letter for a theoretical Section 4945 scenario.
(2) In the example above, Charlie was found to be a CPA who worked for a decade
for a large public charity. After consulting Area Counsel, Agent Davis determines that Charlie is further liable for the Section 6684 penalty for a willful and flagrant violation. The computations for Charlie’s liability are shown below:
| Tax Year | Tax Amount | Code Section | Penalty Rate | Months Late | Penalty |
|---|---|---|---|---|---|
| 200912 | $1,250.00 | 6651(a)(1) | 4.5% | 5 | $281.25 |
| 200912 | $1,250.00 | 6651(a)(2) | 0.5% | 32 | $200.00 |
| 200912 | $10,000.00 | 6684 | 100% | N/A | $1,250.00 |
| 200912 | $20,000.00 | 6684 | 100% | N/A | $12,500.00 |
| Total Penalty | Total Penalty | Total Penalty | Total Penalty | Total Penalty | $14,231.25 |
(3) Because a penalty under Section 6684 is being proposed, Agent Davis obtains
written supervisory approval for penalty assessment to comply with Section 6751(b)(1) and includes all pertinent documentation in the case file.
(4) As the transaction is not corrected, Private Foundation Bravo is subject to the
second tier tax on the entire amount of the transaction. Without correction, Agent Davis would issue the following formal reports of examination to Private Foundation Bravo and Foundation Manager Charlie that include the second tier tax with a 30-day letter (Letter 3614):
115
Exempt Organizations Excise Tax Audit Changes
(Chapter 41, Chapter 42, and Section 170(f)(10)(F) Excise Taxes)
Taxpayer)
See attached Explanation of Items
Form 4883 (Rev. 1-2004) Catalog Number 42083F
116
Department of the Treasury Internal Revenue Service www.irs.gov
Exempt Organizations Excise Tax Audit Changes
(Chapter 41, Chapter 42, and Section 170(f)(10)(F) Excise Taxes)
Name of Exempt Organization (if different from Taxpayer) Private Foundation Bravo
| Taxable Years Ended |
Taxable Years Ended |
Taxable Years Ended |
|||
|---|---|---|---|---|---|
| 12/31/2009 | |||||
| Internal Revenue Code Section for Proposed Adjustment |
Internal Revenue Code Section for Proposed Adjustment |
Internal Revenue Code Section for Proposed Adjustment |
4945(a)(2) |
||
1. Adjustments |
1. Adjustments |
Taxable expenditure (birthday gift) |
25,000.00 | ||
1. Adjustments |
1. Adjustments |
||||
1. Adjustments |
1. Adjustments |
||||
1. Adjustments |
1. Adjustments |
||||
1. Adjustments |
1. Adjustments |
||||
1. Adjustments |
1. Adjustments |
||||
| 2. | Total Adjustments |
Total Adjustments |
25,000.00 |
||
| 3. | Amount reported on return or as Previously adjusted |
Amount reported on return or as Previously adjusted |
0.00 |
||
| 4. | Total amount as corrected |
Total amount as corrected |
25,000.00 |
||
| 5. | Applicable tax rate % |
Applicable tax rate % |
5% |
||
| 6. | Initial tax liability as corrected (line 4 x Line 5)* |
Initial tax liability as corrected (line 4 x Line 5)* |
1,250.00 | ||
| 7. | Initial tax liability reported |
Initial tax liability reported |
0.00 |
||
| 8. | Increase (or decrease) in tax |
Increase (or decrease) in tax |
1,250.00 |
||
| 9. | Additional tax (minimum) at 50% (IRC 4945(b)(2)) |
Additional tax (minimum) at 50% (IRC 4945(b)(2)) |
12,500.00 |
||
| 10. | Penalties (IRC 6651(a)(1), 6651(a)(2), 6684) |
Penalties (IRC 6651(a)(1), 6651(a)(2), 6684) |
14,231.25 |
Explanation of Adjustments See attached Explanation of Items
- The tax is capped at $10,000 for Section 4945(a)(2) and $20,000 for Section 4945(b)(2). The failure to pay penalty per Section 6651(a)(2) will continue to accrue until the tax
deficiency is fully paid, up to a maximum rate of 25%.
Department of the Treasury
Form 4883 (Rev. 1-2004) Catalog Number 42083F Internal Revenue Service
Catalog Number 42083F
Department of the Treasury Internal Revenue Service www.irs.gov
117
Exempt Organizations – Report of Examination
| 1. Form No. 4720 |
2. Area Office [Insert name of your area] |
3. Date of Report [Insert date] |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code] |
4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code] |
4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code] |
4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code] |
4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code] |
4. Name and Address of Taxpayer Private Foundation Bravo [Insert street address] [Insert city, state, and zip code] |
5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4) |
5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4) |
5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4) |
5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4) |
5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4) |
5. Name and Address of Private Foundation or Other Exempt Organization (If different from Item 4) |
| 6. Social Security Number or Employer Identification Number [Insert EIN] |
6. Social Security Number or Employer Identification Number [Insert EIN] |
6. Social Security Number or Employer Identification Number [Insert EIN] |
7. Tax Period(s) Ended | 7. Tax Period(s) Ended | 7. Tax Period(s) Ended | 8. Private Foundation’s or other Exempt Organization’s Employer Identification Number_(If different_ from Item 6) |
8. Private Foundation’s or other Exempt Organization’s Employer Identification Number_(If different_ from Item 6) |
8. Private Foundation’s or other Exempt Organization’s Employer Identification Number_(If different_ from Item 6) |
9. Tax Period(s) Ended | 9. Tax Period(s) Ended | 9. Tax Period(s) Ended |
| 6. Social Security Number or Employer Identification Number [Insert EIN] |
6. Social Security Number or Employer Identification Number [Insert EIN] |
6. Social Security Number or Employer Identification Number [Insert EIN] |
6/30/2010 | 6/30/2010 | |||||||
| 6. Social Security Number or Employer Identification Number [Insert EIN] |
|||||||||||
| 6. Social Security Number or Employer Identification Number [Insert EIN] |
6. Social Security Number or Employer Identification Number [Insert EIN] |
6. Social Security Number or Employer Identification Number [Insert EIN] |
|||||||||
| 10. Reporter Preparer’s Name [Insert your name] |
10. Reporter Preparer’s Name [Insert your name] |
10. Reporter Preparer’s Name [Insert your name] |
10. Reporter Preparer’s Name [Insert your name] |
10. Reporter Preparer’s Name [Insert your name] |
10. Reporter Preparer’s Name [Insert your name] |
10. Reporter Preparer’s Name [Insert your name] |
11. Agreement Secured (Check one.) Yes No |
11. Agreement Secured (Check one.) Yes No |
11. Agreement Secured (Check one.) Yes No |
11. Agreement Secured (Check one.) Yes No |
11. Agreement Secured (Check one.) Yes No |
12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative] |
12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative] |
12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative] |
12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative] |
12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative] |
12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative] |
12. Findings Discussed with (Name and Title) [Insert name of a foundation manager or representative] |
13. Agreement Date [Leave blank] |
13. Agreement Date [Leave blank] |
13. Agreement Date [Leave blank] |
13. Agreement Date [Leave blank] |
13. Agreement Date [Leave blank] |
14a. Summary of Proposed Adjustments |
14a. Summary of Proposed Adjustments |
14a. Summary of Proposed Adjustments |
14a. Summary of Proposed Adjustments |
14a. Summary of Proposed Adjustments |
14a. Summary of Proposed Adjustments |
14a. Summary of Proposed Adjustments |
14b. Penalty | 14b. Penalty | 14b. Penalty | 14b. Penalty | 14b. Penalty |
| Internal Revenue Code Section (1) |
Period Covered by Examination (2) |
Period Covered by Examination (2) |
Period Covered by Examination (2) |
Amount of Tax (3) |
Amount of Tax (3) |
Additional Tax (4) |
Internal Revenue Code Section (1) |
Internal Revenue Code Section (1) |
Internal Revenue Code Section (1) |
Amount (2) |
Amount (2) |
| 4945(a)(1) | 6/30/2010 | 6/30/2010 | 6/30/2010 | 4,000.00 | 4,000.00 | 25,000.00 | |||||
See attached Explanation of Items
16. Attachments
Form 4621 Rev (1-2004) Catalog Number 41830Q
118
Deparatment of the Treasury Internal Revenue Service www.irs.gov
Exempt Organizations – Report of Examination
See attached Explanation of Items
16. Attachments
Form 4621 Rev (1-2004) Catalog Number 41830Q
119
Deparatment of the Treasury Internal Revenue Service www.irs.gov
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