Blog · 14 October 2026

Intermediate Sanctions After Jagannath: §4958 Excess Benefit Transactions, Form 4720 and What US CPA Firms Should Tell Clients

By Keshav Bansal, CA

Intermediate sanctions under IRC §4958 are excise taxes on insiders who take more from a charity than they give back. In Jagannath v. Commissioner, T.C. Memo. 2026-92 (filed September 24, 2026; Judge Weiler), the Tax Court held that the president of a §501(c)(3) organization, Senecura, engaged in an excess benefit transaction of $590,000. It sustained $1,327,500 of §4958 tax plus additions to tax for not filing Form 4720. For US CPA firms that prepare Forms 990 or advise nonprofit boards, it shows how fast an insider “loan” becomes a personal tax bill.

What happened in Jagannath

Per the opinion, Mr. Jagannath formed Senecura, a Tennessee nonprofit recognized under §501(c)(3) effective September 9, 2015, and was its president in 2016. He was also the sole member of Pingala Group, LLC, a disregarded real estate LLC.

• April 4, 2016: Senecura’s money market account showed an “Over the Counter Withdrawal” of $590,000.
• April 15, 2016: he signed a promissory note, as both lender (for Senecura) and borrower (for Pingala), for $590,000 with no interest, due December 31, 2021. As of trial, Pingala had not repaid it.
• 2016 and 2017 Forms 990: Part X, line 5 reported $590,000 of “loans and other receivables from current and former officers, directors, trustees, key employees, and highest compensated employees,” but Schedule L, Part II was not attached.

At trial he no longer argued the note was a bona fide loan. Instead, he said no money reached him and that a $600,000 wire into Senecura on December 30, 2016 repaid the withdrawal. The court found his testimony self-serving and not credible. It relied on the bank records, the note signed 11 days after the withdrawal, and the Forms 990, which were never amended, and found Senecura received no consideration.

Bloomberg Tax (September 28, 2026) and Shumaker, Loop & Kendrick summarize the holding the same way.

The math: 25% first tier, 200% second tier

• First-tier tax, §4958(a)(1): 25% of the excess benefit, paid by the disqualified person. Here, 25% × $590,000 = $147,500.
• Second-tier tax, §4958(b): 200% of the excess benefit if it is not corrected within the taxable period. Here, 200% × $590,000 = $1,180,000.
• Total sustained: $1,327,500 under §4958(a)(1) and (b).

Under §4958(f)(5), the taxable period runs from the date of the transaction to the earlier of the mailing of the notice of deficiency for the first-tier tax or its assessment. Appeals mailed the notice on May 24, 2022, so the window to correct closed then. For the mailing rules and the 90-day petition clock, see our post on the notice of deficiency after Lindsey.

Correction to our earlier notes: the notice of deficiency determined $1,347,500 of §4958 tax. The difference from the $1,327,500 sustained is a $20,000 organization-manager tax under §4958(a)(2), which the IRS conceded before trial. The notice also determined §6651(a)(1) and (a)(2) additions of $33,187.50 and $36,875. The court sustained both additions, but its decision will be entered under Rule 155, so the final figures follow the parties’ computations.

Key definitions for intermediate sanctions

• Applicable tax-exempt organization: per the 2025 Form 4720 instructions, a §501(c)(3) (other than a private foundation), §501(c)(4) or §501(c)(29) organization, or one that held that status in the prior five years.
• Disqualified person: anyone in a position to exercise substantial influence over the organization during the five years ending on the transaction date (§4958(f)(1)), plus family members and 35% controlled entities. Jagannath stipulated this status.
• Excess benefit: the value of the economic benefit provided minus the consideration received, including services (§4958(c)(1)(A)).
• Organization managers: a manager who knowingly participates owes 10% of the excess benefit, capped at $20,000 per transaction (Form 4720 instructions). The tax falls on individuals, not the charity. The instructions say the organization must not pay a disqualified person’s or manager’s §4958 tax.

The IRS intermediate sanctions page adds that it may still propose revocation of exemption in appropriate cases, whether or not §4958 taxes are imposed.

Correction and the rebuttable presumption

Under Treas. Reg. §53.4958-7, a disqualified person corrects by paying the charity the correction amount in cash or cash equivalents. A promissory note does not count. The correction amount is the excess benefit plus interest compounded annually at a rate at least equal to the applicable federal rate for the month of the transaction. For AFR background, see our AFR rates and below-market loans post. In Jagannath, the IRS’s February 24, 2020 letter asked for the $590,000 plus $26,215.21 of interest.

Treas. Reg. §53.4958-6 presumes compensation reasonable, or a property transfer at fair market value, when a conflict-free authorized body approves it in advance, relies on comparability data and documents its decision at the time. An insider signing both sides of his own interest-free note meets none of those conditions.

Form 4720, Schedule L and the filing trail

• Each disqualified person and manager files his or her own Form 4720, by the 15th day of the 5th month after the end of that person’s tax year. Form 8868 requests an extension.
• The organization completes Schedule I of its own Form 4720 to report the transaction, and reports excess benefit transactions on Form 990, Schedule L, Part I. Loans to interested persons go in Schedule L, Part II.
• Relief from first-tier tax under §4962 is requested on Form 843.
• Because Mr. Jagannath never filed Form 4720, the IRS prepared a §6020(b) substitute return, which supported the failure-to-pay addition.

What US CPA firms should tell clients

• List disqualified persons every year: officers, directors, key employees, their family members, and 35% controlled entities.
• Flag every insider loan or transfer. Get board approval in advance by members without a conflict, along with comparability data and minutes written at the time.
• Make Form 990 match the books. If Part X line 5 shows an insider receivable, Schedule L Part II must be attached. If the 990 is wrong, amend it.
• Correct fast, in cash, with AFR-level interest, before any notice of deficiency, to stop the 200% tax.
• Remind insiders that Form 4720 is personal and the charity cannot pay or reimburse the tax.
• Treat “it was repaid” as a documentation question. Trace wires to the account the money left from, and keep the donor records.

For donor-side paperwork, see charitable contribution substantiation after Williams.

Where this fits for Tax Brew readers

Much §4958 risk sits in reconciliation: matching bank activity, receivables and Schedule L before the Form 990 is signed. Tax Brew provides outsourced bookkeeping and tax prep support to US CPA firms, so your reviewers can focus on governance and judgment calls. Email info@taxbrewglobal.com.

Check current IRS guidance: this article summarizes Jagannath v. Commissioner, T.C. Memo. 2026-92 (Docket No. 18629-22, filed September 24, 2026); IRC §§4958, 4962 and 6651; Treas. Reg. §§53.4958-6 and 53.4958-7; the 2025 Instructions for Form 4720 (Schedule I); the Instructions for Schedule L (Form 990); and the IRS “Intermediate sanctions” page, with coverage from Bloomberg Tax (September 28, 2026) and Shumaker, Loop & Kendrick. This is general information, not tax or legal advice. Sources as of 14 October 2026.