The NY Attorney General has released an analysis of financial reports filed by professional fundraisers for telemarketing campaigns conducted in NY in 2010:

" Last year donors contributed a quarter of a billion dollars to charities through telemarketing campaigns conducted in New York. Yet what many donors may not realize is that only a fraction of the funds raised through telemarketing is typically kept by the charities."

In the Rochester and surrounding region, the AG reports that 37.62% of funds raised actually went to the charities. The rest went to pay the cost of fundraising, including fees to the telemarketer.

(From a speech by Howard Shoenfeld, IRS Special assistant for tax exempt organizations)

1 . Organization fails to consider obvious and subtle unrelated business income tax issues.

2. Organization improperly classifies employees as independent contractors.

3. Organization improperly allocated revenue and expenses between activities or among affiliates.

4. Organization fails to report changes in its operations or activities to the IRS.

5. Organization overlooks IRS conditions in a ruling letter or fails to heed IRS audit changes and cautions.

6. Organization and its related entities deal with each other improperly.

7. Organization files incomplete or inaccurate information and tax returns.

8. Organization fails to maintain adequate books and records.

9. Organization fails to comply with applicable lobbying rules and limitations.

10 Organization fails to follow public inspection and fundraising disclosure requirements.

The Excess Benefits Tax is designed to penalize those who profit unfairly from their relationship with a nonprofit organization. Many times the tax will be triggered by a transaction the participants thought was perfectly ordinary. Indeed, some transactions that might be ok between an owner and his business, would trigger the tax when they're between a nonproft and a related party.

The best way to understand what the IRS is looking for, is to look at  examples: 

As we previously reported, the "Taxpayer Bill of Rights 2" (IRC §4958) adopted three new penalty taxes that might apply when tax-exempts engage in transactions that benefit certain insiders. The taxes are called "intermediate sanctions" because, before §4958 was adopted, the only penalty the IRS could impose on these private inurement transactions was revocation of tax exemption.

The IRS has enormous discretion to impose these three new taxes as punishment any time the IRS thinks you overpaid an insider for a product or service. The regs. offer guidance for boards to achieve a "rebuttable presumption" of reasonableness, but this presumption could be difficult (and costly) to achieve, and is not a "safe harbor" because the IRS can still challenge it. And, although §4958 never uses the word "compensation", the regs. make it clear the IRS will be looking for, and penalizing, unreasonable compensation paid by tax-exempts.