IRS Instruction 4720 – In the complex world of tax-exempt organizations and private foundations, navigating excise taxes can be challenging. IRS Form 4720, officially titled “Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code,” serves as the key document for reporting and paying these taxes. This SEO-optimized guide breaks down the 2025 instructions for Form 4720, helping private foundations, disqualified persons, foundation managers, and other applicable entities understand their obligations. Whether you’re dealing with self-dealing, excess benefit transactions, or prohibited tax shelter activities, we’ll cover everything you need to know using the latest IRS guidelines.
What Is IRS Form 4720 and Its Purpose?
Form 4720 is designed to calculate and remit various excise taxes imposed on tax-exempt organizations, private foundations, and related individuals under Chapters 41 and 42 of the Internal Revenue Code (IRC). Its primary purpose is to enforce compliance by penalizing activities that could undermine the charitable intent of these entities, such as improper financial dealings or failures to meet distribution requirements.
Key taxes reported on Form 4720 include:
- Initial taxes on private foundations for violations like self-dealing (Section 4941), failure to distribute income (Section 4942), excess business holdings (Section 4943), investments jeopardizing charitable purposes (Section 4944), and taxable expenditures (Section 4945).
- Taxes on excess benefit transactions (Section 4958), political expenditures by 501(c)(3) organizations (Section 4955), and excess lobbying (Section 4911).
- Additional levies for donor-advised funds, such as taxable distributions (Section 4966) and prohibited benefits (Section 4967).
- Excise taxes on excess executive compensation (Section 4960), net investment income for certain private colleges (Section 4968), and prohibited tax shelter transactions (Section 4965).
By filing Form 4720, entities ensure transparency and avoid steeper penalties, with taxes calculated per year or part-year during the taxable period.
Who Must File Form 4720?
Not every tax-exempt organization needs to file Form 4720—only those engaging in specific taxable activities or transactions. Here’s a breakdown:
- Private Foundations and Trusts: If you’re a private foundation or a Section 4947(a) trust and answer “Yes” to relevant questions on Form 990-PF or Form 5227, you must file for taxes under Sections 4941–4945.
- Supporting Organizations and Donor-Advised Funds: Required for excess business holdings (Schedule C), taxable distributions (Schedule K), or prohibited benefits (Schedule L).
- 501(c)(3) Organizations: File for political expenditures (Schedule F), excess lobbying (Schedule G), or disqualifying lobbying leading to status revocation (Schedule H).
- Hospital Organizations: If failing community health needs assessment requirements under Section 501(r)(3) (Schedule M).
- Applicable Tax-Exempt Organizations (ATEOs): For excess executive compensation or parachute payments (Schedule N).
- Private Colleges and Universities: Those meeting criteria for net investment income tax (Schedule O), such as having at least 500 tuition-paying students and $500,000 in assets per student.
- Individuals and Disqualified Persons: Foundation managers, self-dealers, donors, donor advisors, and related persons must file separate returns for their share of taxes (Part II).
Disqualified persons typically include family members, substantial contributors (over 35% control), and foundation managers. Importantly, each liable party files independently—managers and disqualified persons can no longer report on the organization’s return.
When and How to File Form 4720?
Timing is critical to avoid additional penalties. File Form 4720 by the due date of your organization’s annual information return (e.g., Form 990 or 990-PF), typically the 15th day of the 5th month after the tax year ends. For calendar-year filers in 2025, this means May 15, 2026. Individuals file by the 15th day of the 5th month after their tax year ends.
- Electronic Filing: Mandatory for private foundations and most exempt organizations since tax years beginning after July 1, 2019. Use IRS e-file systems for efficiency.
- Paper Filing: Send to the Ogden, UT, IRS Center if eligible (domestic: 84201-0027; foreign: P.O. Box 409101, Ogden, UT 84409). Use certified mail or designated delivery services for proof of timely filing.
- Extensions: Request via Form 8868, but pay any estimated tax due to avoid interest.
- Payments: Use EFTPS, electronic funds withdrawal, or checks. Round amounts to whole dollars and pay from personal funds for individual liabilities to prevent further taxes.
Foreign organizations report in U.S. currency but may be exempt from certain Chapter 42 taxes if support is primarily non-U.S.
Key Excise Taxes Covered in Form 4720 Instructions
Form 4720 addresses a range of excise taxes. Below are details on major ones, including rates and definitions:
Section 4941: Self-Dealing
- Tax Rate: 10% on the self-dealer per act/year; 5% on foundation managers (up to $20,000 per act).
- Definition: Involves sales, leases, loans, or compensation between a private foundation and disqualified persons. Exceptions include certain grants and program-related investments.
Section 4942: Failure to Distribute Income
- Tax Rate: 30% on undistributed income from prior years.
- Applies To: Foundations not meeting minimum distribution requirements.
Section 4943: Excess Business Holdings
- Tax Rate: 10% on excess value; additional 200% if not corrected.
- Definition: Holdings exceeding 20% in a business enterprise (with disqualified persons). De minimis rules and disposition periods apply.
Section 4944: Jeopardizing Investments
- Tax Rate: 10% on the foundation; 10% on managers (up to $10,000 per investment).
Section 4945: Taxable Expenditures
- Tax Rate: 20% on the foundation; 5% on managers (up to $10,000 per expenditure).
Section 4958: Excess Benefit Transactions
- Tax Rate: 25% on disqualified persons; 10% on managers (up to $20,000 per transaction).
- Definition: Transactions providing undue benefits to insiders in 501(c)(3), (4), or (29) organizations.
Section 4966–4968: Donor-Advised Funds and Educational Institutions
- 4966: 20% on sponsoring organizations for improper distributions; 5% on managers (up to $10,000).
- 4967: 125% on prohibited benefits; 10% on managers (up to $10,000).
- 4968: 1.4% on net investment income for qualifying private colleges.
Other taxes include Section 4960 (21% on excess compensation over $1M) and Section 4965 (up to 21% on prohibited tax shelters).
Recent Updates in the 2025 Instructions for Form 4720
The 2025 instructions reflect ongoing IRS emphases on electronic filing and separate reporting:
- Mandatory e-filing for more entities, with exceptions for certain 2020 returns.
- Revised Item B for multiple organizations.
- Enhanced guidance on corrections in schedules rather than Item B.
- Updates to electronic payment options and direct deposit for refunds via Form 8050.
- References to recent notices and treasury decisions for donor-advised funds and excess compensation.
Always check IRS.gov/Form4720 for post-publication developments.
Tips for Filing Form 4720 and Ensuring Compliance
To avoid common pitfalls:
- Review specific schedule instructions before completing.
- Document corrections fully, including dates and steps taken.
- Prorate joint liabilities and list all parties.
- Use IRS resources like phone support (877-829-5500) for questions.
- File amended returns completely if errors are discovered; request abatements via Form 843.
- Retain records as per the Paperwork Reduction Act.
Consult a tax professional for complex scenarios, as improper filing can lead to additional taxes or loss of exempt status.
Conclusion: Stay Compliant with IRS Form 4720
Mastering the instructions for Form 4720 is essential for private foundations and tax-exempt entities handling excise taxes under Chapters 41 and 42. By understanding who must file, key taxes, and filing requirements, you can minimize risks and maintain compliance. Download the latest PDF from IRS.gov and review annually for updates. If you’re unsure, seek expert advice to navigate these rules effectively.