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March 2004

Alert: IRS Announces Electronic Filing for Foundations and Exempt Organizations

As of February, 2004, the Internal Revenue Service (IRS) will permit the foundation tax returns, Forms 990 and 990-EZ, to be filed electronically. This return will satisfy the filing and registration requirements in 37 states.

Preparation of the returns will be simplified as well through an automated system that provides tax return software, including the necessary forms and attachments, and will perform calculations. The system is secure, since only authorized users will have access.

Any exempt organization that files Form 990 or 990-EZ may take part in the program.

IRS: e-file for Charities and Non-Profits

IRS: Forms 990/990-EZ & 1120POL Software Vendors

Independent Sector: Electronic Data Initiative for Nonprofits

Reminder: A Foundation That Pays Off the Pledge of the Founder or Other Disqualified Person is a Prohibited Act of Self-Dealing

This can be inadvertent. For example, if an individual makes a pledge to a charity during his or her lifetime, which remains unpaid at the donor's death, the donor's foundation can be used to satisfy this pledge without violating the self-dealing rules. On the other hand, if the foundation makes a grant commitment to a charity, and the donor personally pays off this obligation, the contribution will be fully deductible (up to the normal limitations) and there is no risk of self-dealing.

IRS: 7.27.15 Taxes on Self-Dealing

The Council on Foundations: What are the rules against self-dealing?

Planning Idea: Many Private Foundations are Under the Impression That a Gift to an Individual is Prohibited

Not true. While gifts to individuals, instead of to public charities, may be unusual, it is permitted if the gift meets the specific charitable tests. So, scholarships given directly by a foundation are permitted, if the IRS has pre-approved the scholarship process, and other grants to individuals that meet the charitable criteria (e.g. low income, disabled, or disadvantaged) are permitted as long as the foundation follows the requirements for tracking the use of the funds and it reports to the IRS on the distribution. This is called “expenditure responsibility” and imposes an administrative responsibility on the foundation that may be more burdensome than the board of the foundation may want. So, understand the rules and procedures, but proceed if you are prepared to accept the criteria, reporting, and follow up.

The Foundation Center: Information on Grants to Individuals

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