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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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.

Donor-advised funds, supporting organizations, and private foundations are all tax-exempt charitable-giving vehicles. Donor-advised funds are separate accounts held by a public charity to receive contributions from donors who may recommend, but not control, charitable distributions from the account. Supporting organizations are public charities that are to carry out their tax-exempt purpose by supporting one or more tax-exempt organizations, usually other public charities. Compared with private foundations, donor-advised funds and supporting organizations give donors less control over how their donation will be used but provide donors more favorable tax deductions, lower administration costs, less IRS oversight, and fewer reporting requirements. Donor-advised funds hold billions of dollars in assets, and supporting organizations and private foundations hold hundreds of billions of dollars in assets. Public charities and private foundations must annually file an IRS Form 990 or Form 990-PF, respectively, to report their activities. However, donor-advised fund data are limited because organizations that maintain the funds are not required to separately report fund data from other financial data on Form 990. Although some supporting organization characteristics can be determined from Form 990 data, other characteristics, such as the rate at which payments are made to charities and details about the recipients of loans from the organization, cannot be reliably determined. Concerns have arisen about the "payout" rate to charities, and Congress is considering a minimum payout requirement, similar to the one for private foundations. Further, supporting organizations are not required to report their supported organizations' identification numbers, making it more difficult to track the relationship between organizations. To collect additional data, IRS revised Form 990 for 2003 and 2005 and is considering further revisions, but no firm plans have been determined. According to IRS managers, examinations reveal that some donor-advised funds and supporting organizations are used in abusive schemes to unallowably benefit donors or related parties or give donors excess control of charitable assets and operations. In some cases, IRS is able to clearly determine noncompliance and assign appropriate corrective actions. However, in other cases, IRS faces challenges gathering evidence or addressing activities that do not seem to benefit charities, but do not violate any law or regulation, such as when a supporting organization loans money, at market rate, to a donor, director, or officer of the organization. Promoters, who are individuals or entities who facilitate abusive schemes, further complicate IRS's examination efforts.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: 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.

    Status: Closed - Implemented

    Comments: 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.

    Matter: 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.

    Status: Closed - Implemented

    Comments: 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".

    Matter: 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.

    Status: Closed - Not Implemented

    Comments: 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).

    Recommendations for Executive Action

    Recommendation: 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).

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Not Implemented

    Comments: 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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