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A renewed focus from the IRS on Private Foundations has led many NFP organizations to speak up with formal suggestions.

Tax strategies

IRS 2021 Plan Highlights Focus on Private Foundations

  • Matthew Charette
  • Laura Kenney
  • 4/20/2021

Key insights

  • In order to raise awareness of certain private foundation complex restrictions, the IRS Tax Advisory Council, as well as a new coalition of philanthropists and foundations, recommends clearer communication from the IRS.
  • The latter coalition has also made formal common-sense reforms recommendations to Congress.
  • While the future remains unknown, these suggestions may steer the types of reforms and actions that the IRS can make.

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The IRS appears to be bringing focus to private foundations this year, with the Tax-Exempt and Government Entities (TE/GE) group naming private foundations one of its priorities for fiscal year 2021. In the annual Program Letter for FY 2021, Publication 5313 (Rev. 9-2020), the TE/GE group states one of its goals under the “Strengthen Compliance Activities” initiative as:

“Support tax compliance in the global high wealth arena, especially for private foundations and retirement plans of closely held business, such as employee stock ownership plans.”

Initial steps to bring support for private foundations

Both the IRS Tax Advisory Council (council) and a new coalition of philanthropists and major foundations recently recommended steps to support private foundations. This includes providing incentives and reforms to help private foundations “address the immense needs” in this current environment.

In November 2020, the council recommended (IRS Publication 5316) the IRS heighten awareness of certain complex private foundation restrictions. In the TE/GE Subgroup Report of Publication 5316, the council explains: “Problems that can occur with respect to private foundations include violating certain ‘self-dealing,’ ‘mandatory payout,’ ‘excess business holding,’ ‘investment,’ and ‘expenditure’ restrictions and improperly filing information returns.”

To increase awareness of these complex restrictions, the council suggests the IRS create and share a webpage with easily digestible information and descriptions of common pitfalls faced by private foundations.

Groups bring recommendations for Congress

A new coalition of influential philanthropists and major foundations introduced a Giving Tuesday initiative on December 1, 2020. The initiative was designed to accelerate charitable giving from private foundations, donor advised funds (DAFs), and individuals — particularly because of the current economic and social conditions from the pandemic. On the Initiative to Accelerate Charitable Giving website, the coalition proposed “common-sense reforms” for Congress to consider:

  1. For private foundations, close loopholes to see that distributions qualifying for the payout requirement are available for use by working charities, and incentivize greater payout through reforms to the excise tax.
  2. For DAFs, adopt measures to distribute DAF accounts to working charities within a reasonable period.
  3. For individuals, incentivize greater giving by expanding and extending the new non-itemizer charitable deduction in a cost-effective way.

The coalition indicated that private foundations have more than $1 trillion in assets and DAFs have more than $120 billion set aside to support operating charities in the future. The initiative’s tax proposals to Congress for private foundation reforms and payout incentives include:

  • Salaries or travel expenses of foundation family members would not qualify for the private foundation distribution requirements.
  • Grants to DAFs would also not qualify for the private foundation distribution requirements.
  • Donors wouldn’t be able to avoid private foundation status by funding their entities through DAFs.
  • Private foundations that distribute 7% or more would not have to pay excise tax that year.
  • Any newly created private foundation with a life of 25 years or less would have the investment excise tax eliminated.

On January 27, 2021, the Philanthropy Roundtable, along with 64 other organizations, sent a letter to members of Congress urging them to oppose the reforms, particularly what they called the initiative’s “unnecessary and arbitrary regulations on donor-advised funds” and the proposed restrictions on a “family’s ability to serve its own foundation, which would unfairly target smaller and less-wealthy institutions.”

How the IRS will support and strengthen compliance for private foundations is unknown. Foundation managers and their tax professionals will have to wait and see whether any of the recommendations set forth by the IRS Tax Advisory council will be incorporated by the IRS or if Congress will enact any of the suggestions published by the new coalition of philanthropists and major foundations.

How we can help

CLA’s nonprofit tax advisors can help you understand what’s new in the private foundation tax world, including addressing common filing missteps and deciphering complex rules. Having this knowledge may assist your foundation in avoiding potential risks both from a regulatory and public relations perspective. 

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  • Matthew Charette
  • Senior