Federal Form 4720: Who Files, Triggers, and Penalty Tiers

Form 4720 is the IRS return used to report and pay the excise taxes that fall on tax-exempt organizations, their managers, and other insiders under Chapters 41 and 42 of the Internal Revenue Code. It covers roughly a dozen categories of prohibited conduct, from self-dealing inside a private foundation to excess compensation at a public charity, and the tax often lands on individuals rather than the organization itself. Each liable person files their own separate return.¹

Who Files Form 4720

The form is used by three overlapping groups: the tax-exempt organizations subject to Chapters 41 and 42, the insiders who benefit from prohibited transactions, and the managers who approve them. Private foundations, public charities, social welfare organizations, sponsoring organizations of donor-advised funds, and certain other exempt entities can all be filers. So can any “disqualified person” who received a prohibited benefit, and any officer, director, or trustee who knowingly agreed to the transaction.²

Two rules matter here. First, every liable person files a separate Form 4720; a manager or disqualified person cannot piggyback on the organization’s return. Second, the organization cannot pay someone else’s tax. If a private foundation covered a manager’s or a disqualified person’s excise tax, that payment would itself be a new act of self-dealing or a taxable expenditure, producing another round of tax.¹

The category of “disqualified person” does a lot of work in these rules. For private foundations, it reaches substantial contributors (generally, anyone who has given more than $5,000 when that amount is also more than 2% of all contributions received), foundation managers, and family members of either group. Ownership attribution can pull in additional people through spouses, children, and grandchildren.³ When more than one manager is liable for the same act, they share joint and several liability, so the IRS can collect the full amount from any one of them.⁴

What Triggers the Excise Tax

The transactions reportable on Form 4720 fall into a handful of families. Knowing which family applies tells you which Code section governs the rate and who owes.

Private Foundation Violations

Chapter 42 targets five kinds of foundation conduct, and each must be reported even if the situation has already been fixed:

Self-dealing under Section 4941 covers almost any financial transaction between a foundation and a disqualified person, regardless of price fairness. The initial tax is 10% of the amount involved on the disqualified person and 5% on any manager who knowingly participated.⁴
Failure to distribute income under Section 4942 triggers a 30% tax on the foundation for the undistributed amount.⁵
Excess business holdings under Section 4943 apply when a foundation and its disqualified persons together hold more than 20% of a business, with a 10% tax on the excess.⁶
Jeopardizing investments under Section 4944 draw a 10% tax on the foundation and 10% on any manager who knowingly approved them.
Taxable expenditures under Section 4945, which include lobbying, electioneering, grants to individuals without approved procedures, and grants to non-charities without expenditure responsibility, carry a 10% tax on the foundation and 5% on the knowing manager, capped at $10,000 per expenditure.⁷

Excess Benefit Transactions at Public Charities

Public charities and social welfare organizations that pay an insider more than the value of services received owe excise tax under Section 4958. The disqualified person who received the excess benefit owes 25% of the excess amount, and a manager who knowingly approved it owes 10%, capped at $20,000 per transaction. The organization reports the transaction but does not pay the tax; the individuals do, on their own Form 4720.⁸ The IRS calls these “intermediate sanctions” because they penalize the individual instead of revoking the charity’s exempt status.⁹

Political and Lobbying Expenditures

A 501(c)(3) organization that spends money on a political campaign owes a 10% tax on the amount, and any manager who knowingly agreed to it owes 2.5%, capped at $5,000.¹⁰ A public charity that elected under Section 501(h) and exceeded its lobbying ceiling owes 25% of the excess under Section 4911.¹¹ A separate 5% tax under Section 4912 applies when a 501(c)(3) actually loses its exempt status because of lobbying.¹²

Donor-Advised Fund Transactions

A taxable distribution from a donor-advised fund triggers a 20% tax on the sponsoring organization and 5% on any knowing fund manager, capped at $10,000 per distribution.¹³ Section 4967 imposes a separate tax when a donor, donor advisor, or related person receives a prohibited benefit from a fund, and each person owing that tax files their own Form 4720.¹

Other Reportable Taxes

The form also handles taxes on tax-exempt entities that participate in prohibited tax shelter transactions (Section 4965), hospital organizations that fail community health needs assessment requirements (Section 4959), excess compensation paid to executives of exempt organizations (Section 4960), and the net investment income of certain private colleges and universities (Section 4968).¹

The Two-Tier Penalty Structure

Chapters 41 and 42 use a two-tier system designed to make correction far cheaper than delay. The initial tax (Tier 1) starts accruing on the date the prohibited act occurs and continues for each year or part of a year until the act is corrected or the IRS mails a notice of deficiency.²

If the transaction remains uncorrected past the taxable period, Tier 2 rates escalate sharply. Self-dealing jumps to 200% of the amount involved on the disqualified person, with 50% on a manager who refuses to agree to correction, capped at $20,000.⁴ Failure to distribute income becomes 100% of the amount still undistributed.⁵ Excess business holdings become 200% of the excess. Taxable expenditures rise to 100% on the foundation and 50% on the manager. Excess benefit transactions become 200% of the excess benefit on the disqualified person.⁸ Political expenditures become 100% on the organization and 50% on the manager.¹⁰

The jump from Tier 1 to Tier 2 is where filers face real financial exposure. A self-dealing act involving $500,000 that goes uncorrected produces a Tier 2 tax of $1,000,000 on the disqualified person, on top of the initial 10% tax that accrued each year.

Correction generally means undoing the transaction so the organization ends up at least as well off as it would have been under the highest fiduciary standards. For a self-dealing sale of property, the disqualified person typically returns the property or its fair market value, whichever benefits the foundation more. For an excess benefit transaction, the disqualified person returns the excess amount plus interest. The taxable period runs from the date of the act until the earlier of a notice of deficiency or the assessment of the Tier 1 tax; correcting inside that window keeps Tier 2 from ever applying.⁴ For most Chapter 42 violations other than self-dealing, Section 4962 allows the IRS to abate the Tier 1 tax entirely if the act was due to reasonable cause, was not willful neglect, and was corrected within the correction period; abatement is requested on Form 843.¹⁴

Deadlines, Extensions, and Filing Method

Form 4720 must be filed for each year a taxable act remains uncorrected, not just the year it first occurred.² Due dates depend on the filer:

Organizations file by the due date of their annual return (Form 990-PF, 990, or 990-EZ), not including extensions. An organization that files none of those returns has until the 15th day of the 5th month after its accounting period ends.
Individuals (managers, disqualified persons, donors, donor advisors) file by the 15th day of the 5th month after the end of their personal tax year, which is May 15 for calendar-year filers.

If the due date falls on a weekend or legal holiday, it shifts to the next business day.¹

An automatic six-month extension is available by filing Form 8868 specifically for Form 4720. An extension of the organization’s Form 990-PF does not carry over; a separate Form 8868 is required.¹⁵ The extension buys time to file the return, not time to pay.¹⁶

Private foundations must file Form 4720 electronically; paper returns are not accepted from them. Other filers who submit 10 or more returns of any type in the calendar year (including W-2s, 1099s, and employment tax returns) also have to file electronically. Filers below that threshold may still file on paper.¹

Retirement Plan Transactions Use Form 5330 Instead

Prohibited transactions involving retirement plans and IRAs under Section 4975 do not belong on Form 4720. Those excise taxes, starting at 15% of the amount involved, are reported and paid on Form 5330, Return of Excise Taxes Related to Employee Benefit Plans.¹⁷ Managers involved in a prohibited tax shelter transaction that touches a retirement plan also file on Form 5330 rather than Form 4720.¹⁴ The two forms share concepts like disqualified persons, tiered penalties, and correction requirements, but using the wrong one delays processing and can create additional compliance problems.

1
Internal Revenue Service. Instructions for Form 4720 (2025)
2
Internal Revenue Service. Form 4720
3
Internal Revenue Service. Disqualified Persons
4
Office of the Law Revision Counsel. 26 USC 4941 – Taxes on Self-Dealing
5
Office of the Law Revision Counsel. 26 USC 4942 – Taxes on Failure to Distribute Income
6
Office of the Law Revision Counsel. 26 USC 4943 – Taxes on Excess Business Holdings
7
Internal Revenue Service. Taxes on Taxable Expenditures – Private Foundations
8
Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions
9
Internal Revenue Service. Intermediate Sanctions
10
Office of the Law Revision Counsel. 26 USC 4955 – Taxes on Political Expenditures of Section 501(c)(3) Organizations
11
Office of the Law Revision Counsel. 26 USC 4911 – Tax on Excess Expenditures to Influence Legislation
12
Office of the Law Revision Counsel. 26 USC 4912 – Tax on Disqualifying Lobbying Expenditures of Certain Organizations
13
Federal Register. Taxes on Taxable Distributions From Donor Advised Funds Under Section 4966
14
Internal Revenue Service. 2025 Instructions for Form 4720
15
Internal Revenue Service. Instructions for Form 8868
16
Internal Revenue Service. Form 8868 – Application for Extension of Time to File an Exempt Organization Return or Excise Taxes Related to Employee Benefit Plans
17
Internal Revenue Service. Form 5330 Corner