By: John S. Morlu II, CPA
Running a nonprofit is about trust. Donors give money believing it will go to food banks, shelters, schools, clinics—or whatever the mission may be. But what happens when that trust is broken? What happens when a nonprofit’s money, car, or building is used for something it shouldn’t be?
Well, here’s what the IRS says:
“We don’t just take away your nonprofit status. We fine you. Hard.”
This is the world of intermediate sanctions and excise taxes—and if you’re on a nonprofit board, or in charge of spending, this article could save you from big trouble.
What Is Misuse of Nonprofit Assets?
It means using charitable property, money, or staff time for personal gain or non-mission activities.
That could look like:
- Using the nonprofit’s car for weekend trips
- Paying a family member above-market salary
- Letting a board member use the nonprofit’s office as a private consulting space
- Charging the nonprofit for a vacation disguised as a retreat
- Giving contracts to a friend’s company without bids
Fun Fact: The IRS calls these “excess benefit transactions.” If you receive more than what’s reasonable or fair, the IRS may come for you—and not just gently.
What Happens When You Get Caught?
If the IRS finds that someone got an “excess benefit” from a nonprofit, they don’t always yank your 501(c)(3) status right away. Instead, they can impose something called an excise tax under IRC Section 4958.
Here’s how it works:
Step 1: The 25% Penalty
The person who received the excess benefit (called a disqualified person) must pay 25% of the benefit to the IRS.
Example: If a nonprofit pays a CEO $100,000 more than what’s reasonable, the CEO must pay $25,000 to the IRS. That’s just the beginning.
Step 2: The 200% Penalty
If they don’t pay back the benefit quickly, the IRS can hit them with a 200% penalty on top.
So that $100,000 overpayment?
Now it’s a $200,000 IRS bill. Ouch.
Step 3: Board Members Can Be Fined Too
If the board knew or should have known about the misuse and did nothing?
They can be fined $10,000 per transaction, up to a maximum of $20,000 per person.
Fact: According to a 2024 IRS report, over $21 million in excess benefit taxes were assessed last year alone.
Who Counts as a “Disqualified Person”?
That includes:
- Founders
- Executives
- Board members
- Family members of any of the above
- Anyone with substantial influence over the organization
If you’re one of these people, the nonprofit has to be especially careful when giving you money, contracts, perks, or benefits.
Real-World Examples
Case 1: A Health Clinic Pays Its Founder’s Spouse
A small clinic paid the founder’s spouse $120,000 for “consulting.” There was no written contract and no evidence of actual work. The IRS ruled it an excess benefit. The spouse had to pay $30,000, and the board chair was fined $10,000 for approving it without review.
Case 2: The “Conference” in Cancun
A nonprofit booked a “training retreat” at a luxury resort—only board members attended, and no real work was done. Total cost: $58,000. The IRS demanded repayment and fined attendees for personal use of charitable funds.
Eye-Opening Stats
- 86% of nonprofit fraud cases involve people inside the organization (ACFE Report to the Nations, 2024)
- 50% of nonprofits don’t perform regular conflict-of-interest reviews
- The IRS audited over 3,000 nonprofits last year based on red flags from their Form 990s
7 Things That Might Get You in Trouble
1. Paying someone without a contract
2. Giving “bonuses” with no written policy
3. Letting staff use nonprofit credit cards for personal shopping
4. Renting nonprofit space to friends for cheap
5. Covering personal travel or meals
6. Hiring relatives without documentation
7. Transferring funds to for-profit companies owned by insiders
How to Avoid Trouble
- Document Everything. Salaries, contracts, gifts—write it down and get board approval.
- Do Comparability Studies. Make sure salaries are reasonable for your area and sector.
- Run Conflict-of-Interest Checks. Every board member, every year.
- Keep Minutes. Record every financial decision and who approved it.
- File an Honest 990. Don’t hide transactions or inflate program costs.
Remember: The IRS Reads Form 990s
That annual tax form isn’t just a form. It’s how the IRS and watchdog groups scan for red flags. And if your nonprofit has odd payments, big travel budgets, or unclear leadership roles, it may invite questions.
Final Word: Keep It Clean, Keep It Focused
Nonprofits exist to serve the public—not to enrich insiders. The IRS doesn’t expect perfection, but it does expect fairness, honesty, and good records.
The best-run nonprofits treat financial decisions like they’re being watched—because they are.
And if you’re ever in doubt? Ask an experienced nonprofit CPA. They’re cheaper than a 200% excise tax.
Author: John S. Morlu II, CPA is the CEO & Chief Strategist of JS Morlu, a globally acclaimed public accounting and management consulting powerhouse.
Through cutting-edge technology and data-driven strategy, JS Morlu helps organizations operate with clarity, control, and compliance.
– ReckSoft (www.recksoft.com ): AI-powered reconciliation for nonprofit and donor accounting
– FinovatePro (www.finovatepro.com ): Cloud accounting for donor-driven missions
– Fixaars (www.fixaars.com ): Empowering nonprofits with maintenance and repair logistics