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Tax-Exempt Organizations: Collecting More Data on Donor-Advised Funds and Supporting Organizations Could Help Address Compliance Challenges

GAO-06-799 Published: Jul 27, 2006. Publicly Released: Aug 28, 2006.
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Highlights

Donor-advised funds and supporting organizations are two charitable-giving options that have received attention from Congress and the Internal Revenue Service (IRS) for their potential to facilitate noncompliance with tax law. As requested, GAO is providing information on donor-advised funds and supporting organizations related to (1) federal laws and regulations, compared to private foundations; (2) financial and organizational characteristics; and (3) types of noncompliance and promotion methods and challenges identifying them.

Recommendations

Matter for Congressional Consideration

Matter Status Comments
Congress may wish to consider directing IRS to revise the Form 990 to collect sufficient information so that a consistent payout rate can be calculated for both types of charitable-giving vehicles. This information could help inform decisions about whether to adopt a minimum payout requirement and if any required rate should be adjusted.
Closed – Not Implemented
Congress has not yet directed IRS to collect more information on the Form 990 for computing a consistent payout rate. In the 2006 Pension Protection Act, Congress directed Treasury to 1) issue regulations that require a certain type of supporting organization (i.e., nonfunctionally integrated) to distribute a "significant amount" of income /assets to their supported organizations and to supporting or 2) study whether donor advised funds should have a payout requirement. Neither the regulations nor study have been completed, although comments are being analyzed at Treasury on the draft regulations. As of September 2010, neither of these actions are completed and based on a review of the regulations that are in draft form, we do not see evidence that the spirit of our recommendation will be met (i.e., collecting more information on payout related information).
To help IRS in making these revisions, Congress may wish to consider directing IRS about the types of support that should be included, as it has for private foundations.
Closed – Implemented
Congress has not directed IRS how to define "support" and what to include in computing the amount of support provided by a supporting organization or a donor advised fund. In the 2006 Pension Protection act, Congress directed Treasury to 1) issue regulations that require a certain type of supporting organization (i.e. nonfunctionally integrated) to distribute a "significant amount" of income /assets to their supported organizations and to supporting or 2) study whether donor advised funds should have a payout requirement. Neither the regulations nor the study are done although Treasury is analyzing comments on the draft regulations as of September 2010. We are closing this as implemented because Congress indirectly prompted Treasury to define support by requiring it to do the study and the regulations. Through the drafting and commenting processes in developing the regulations, commenters provided insights that Treasury officials considered in defining "support".
So that IRS can modify the Form 990 to require taxpayer identification numbers (TINs) of loan recipients from supporting organizations, Congress may wish to consider providing IRS authority to protect that information from public disclosure.
Closed – Implemented
As of June 26, 2007, Congress has not provided IRS with the authority to protect the TINs of loan recipients for supporting organizations from public disclosure. IRS said it would be unlikely to require this TIN reporting without that authority. However, in sections 1232 (donor advised funds) and 1234 (supporting organizations) of the 2006 Pension Protection Act, Congress amended IRC section 4958 to extend an existing excise tax to apply to loans (and certain other payments) made to related parties, substantial contributors, etc. (i.e., so called "disqualified persons"). The tax is 25% of the loan or other payment amount (in addition to loan repayment) on the recipient and 10% of the amount on the manager of the supporting organization or donor advised fund. IRS officials said Congress believed that this would have a "chilling effect" on such payments and replaced the need to allow IRS to publicly disclose the TINs of these loan (and payment) recipients. So, although the legislation did not do exactly what our recommendation mentioned, it went further by imposing a financial disincentive for engaging in such loans on not only supporting organizations but also on donor advised funds.

Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service To better understand the characteristics of donor-advised funds and supporting organizations and to better identify possible noncompliance, the Commissioner of Internal Revenue should, as part of the Form 990 revision process, require more comprehensive reporting of donor-advised fund activity.
Closed – Implemented
In early 2007, IRS revised the 2006 Form 990 and accompanying Schedule A to require sponsoring organizations of donor-advised funds to report the total number of funds they maintain, the aggregate value of assets held in such funds, the aggregate contributions to and grants made from the funds during the year, including the amount of cash and non-cash distributions and if any distributions were made to foreign recipients.
Internal Revenue Service To better understand the characteristics of donor-advised funds and supporting organizations and to better identify possible noncompliance, the Commissioner of Internal Revenue should, as part of the Form 990 revision process, require supporting organizations to report their supported organizations' employer identification numbers (EINs).
Closed – Implemented
In early 2007, IRS revised the 2006 Form 990 to require supporting organizations to list the names and identification numbers of the organizations they support, making it easier to track the relationship between organizations and identify supporting organizations that fail to maintain a relationship with the charities they are supposed to support.
Internal Revenue Service To better understand the characteristics of donor-advised funds and supporting organizations and to better identify possible noncompliance, the Commissioner of Internal Revenue should, as part of the Form 990 revision process, require that the TINs for recipients of large loans be reported, if IRS is granted authority to protect the TINs from public disclosure.
Closed – Not Implemented
IRS has not required TINs for recipients of large loans to be reported because Congress did not give IRS authority to protect the TINs from public disclosure. Instead, Congress chose to impose an excise tax on those who grant and receive such loans.

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Topics

Charitable organizationsComparative analysisData collectionFoundations (organizations)Funds managementNoncomplianceProgram abusesTax exempt organizationsTax exempt statusTax lawTax violationsTaxes