A. Identifying and Developing Section 4958 Issues

(1) The following audit steps can help identify and develop issues leading to excise

taxes under Section 4958:

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a. Review Form 990 for items that could indicate issues. Information on the

Form 990 to consider for possible Section 4958 issues includes:

• Part IV, Line 6: If the organization maintains DAFs, see section II.C.8 above for special rules under Section 4958 for DAFs.

• Part IV, Line 25a and b: If the organization reported excess benefit transactions, review Schedule L, Transaction with Interested Persons, and examine the transactions to ensure required excise taxes have been reported and correction has been made.

• Part IV, Line 26: Loans to or from disqualified persons should be analyzed.

• Part IV, Line 27: Examine whether any grants or other assistance provided an excess benefit for a disqualified person.

• Part IV, Line 28a – c: Review transactions reported here and on Schedule L for possible excess benefits.

• Part VI, Line 5: A significant diversion of assets can be an indicator of an excess benefit transaction.

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• Part VI, Line 15: This information can provide details on how the organization determines compensation of key employees.

• Part VII, Column (D): Note compensation for persons listed

• Part VIII, Statement of Revenues: Are there amounts reported for Rents (Line 6) or from sales of assets other than inventory (Line 7) that may be transactions with disqualified persons?

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• Part IX, Line 5, Column (A): Is compensation of officers, directors, trustees, and key employees a significant percentage of total expenses on line 25?

• Part IX, Line 6, Column (A): Note compensation to disqualified persons not reported on Line 5 above.

• Part IX, Line 9, Column (A): Are other employee benefits a significant percentage of total expenses on line 25?

• Part X, Lines 5 and 6: Note loans and receivables including the beginning and ending balances. Were these also reported on Schedule L?

• Part X, Line 22: Note loans and other liabilities to disqualified persons including the beginning and ending balances. Were these also reported on Schedule L?

• Schedule A, Line 12: If the organization is a supporting organization under Section 509(a)(3), see section II.C.9 above for special rules for supporting organizations.

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• Schedule L: Organizations are required to report transactions with interested parties including excess benefit transaction, loans, grants, assistance, and business transactions.

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• Schedule J: Organizations report additional compensation information for officers, directors, trustees, key employees, and highly compensated employees that could be indicators of Section 4958 issues.

b. Review salaries paid to those controlling the organization and to other key

employees. To determine if they’re reasonable, consider factors such as:

• Duties performed

• Amount and type of responsibility

• Time devoted to duties

• Special knowledge and experience

• Individual ability

• Previous training

• Compensation paid in prior years

• Prevailing economic conditions

• Living conditions of the particular locality

• The type of activities carried out by the organization and its size

c. Reconcile salaries the organization paid to employees to wages on Forms

W-2, Wage and Tax Statement of the employees. What was included in taxable income?

d. Request copies of employment contracts or compensation packages as

deemed pertinent. Check the date and the specific compensation the organization intended to pay.

e. Review disbursements. Look for payment of expenses to or for the benefit of

an officer or employee that aren’t reported as wages on Forms W-2.

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f. Consider the status of the recipients to determine who meets the various

criteria of an insider, an outsider, or a disqualified person with respect to the organization.

g. Review other compensation amounts, including fringe benefits. Determine if

they’re excludable from the recipient's gross income under Section 132 or includible under Section 61. Look closely at reimbursements such as travel expenses. Was the payment made under a non-accountable plan? If so, determine if the amounts paid meet the ordinary and necessary requirements of Section 162. Was the amount included on Forms W-2?

h. Analyze loans between the organization and disqualified persons. Are these

bona fide loans? Are the terms of the loan being adhered to?

i. Determine if any sales or exchanges of property occurred. If so, were any

insiders, disqualified persons, foundation managers involved? Was the sale or exchange at fair market value?

j. Analyze the composition of the organization's assets. Did an insider,

disqualified person, foundation manager have personal use of any of them? For example, did any of them use a vehicle for both personal and business travel? If used for personal use, was an amount included on the Forms W-2?

k. Examine fund-raising agreements to determine if they’re at arm's length.

Consider the method of raising funds and whether this income is subject to unrelated business income tax. Does the fund-raiser exercise control over the organization in any way?

l. Determine if any entities are related to the exempt organization. Analyze the

structure of any transactions between the related entities and the exempt organization. Are they at arm's length, at fair market value, exclusive?

m. Use the Lead Sheet, M. Excess Benefit Transactions Lead Sheet, available

on the Exempt Organization Resources Knowledge Base under the Compliance Tools Book to assist in developing Section 4958 issues. The lead sheet is also included in the exhibits below.