Compliance Monitoring for 501(c)(3) Rules & Regulations

A private foundation enjoys unparalleled philanthropic flexibility and financial control. As an independent, freestanding legal entity, the board of the foundation exercises full discretion over its grantmaking activities and its investments. And the IRS gives foundations powerful philanthropic capabilities, enabling them to grant to individuals, run their own charitable programs, award scholarships, grant to international organizations, and more.

The flipside of this extraordinary latitude is that private foundations are subject to complex rules and regulations. On the whole, IRS rules, such as those governing “self-dealing,” are intended to ensure that private foundations, which enjoy significant tax advantages, use their funds to benefit the public—not the people who established them.

Despite the common sense underpinnings of IRS private foundation rules, running a foundation without running afoul of the IRS can be surprisingly tricky. That’s because 501(c)(3) tax law is complicated, often murky, and not always intuitive. Even well-intentioned donors can stray into compliance mistakes that can result in costly, embarrassing violations. But with Foundation Source on your side, there’s no need to worry!

Compliance Oversight

With Foundation Source, you get an integrated team of the best talent in the country, including a veteran group of tax, legal, and accounting experts, providing a collaborative approach to active compliance monitoring for your foundation. They are always on duty, minding the day-to-day transactions. And should they spot potential compliance issues, they alert you and help you make informed decisions about how best to move forward.

KEY FEATURES

  • Verification of each grantee’s 501(c)(3) status as a public charity: Foundation Source reviews proposed grantee organizations to confirm that they are recognized by the IRS as valid 501(c)(3) public charities in good standing prior to releasing grant funds.
  • USA PATRIOT Act and Executive Order 13224 due diligence: Foundation Source checks grantee organizations against national and international watch lists of known/suspected criminal or terrorist organizations and individuals.
  • Grants and expenses monitoring: We alert the foundation when we become aware of grants or expenses that will likely violate IRS regulations for self-dealing, jeopardizing investments, taxable expenditures, excess business holdings, and more. We also assist the foundation to comply with accountable plan rules by obtaining appropriate documentation of foundation expenses.
  • 5% minimum distribution requirement: We track grants and other qualifying expenditures processed through Foundation Source (including qualifying administrative expenses) to determine the foundation’s progress toward meeting its annual 5% annual distribution requirement. Results are updated daily and posted on the foundation’s online console provided by Foundation These results are monitored by Foundation Source staff who will reach out with timely reminders when warranted.
  • Board memberships and affiliations with other nonprofits: Grants going to charities that are controlled by foundation insiders are flagged for special oversight. In order for such grants to count toward the foundation’s 5% minimum distribution requirement, those funds must be disbursed promptly by the grantee. We ensure that both clients and grantees are aware of these rules.
  • Substantial contributors tracking: When provided with the foundation’s historical information, we identify significant contributors, who are considered foundation insiders and therefore subject to self-dealing and other regulations.
  • Identification of supporting organizations: Some nonprofit organizations, such as a university’s alumni association, are a special type of public entity classified as a supporting organization, which may require additional due diligence on behalf of the granting foundation. Foundation Source identifies these organizations and works with our clients to review due diligence options and, if necessary, pursue alternate granting methods, such as expenditure responsibility, that will accomplish the foundation’s charitable intent.
  • Compensation benchmarking for foundation staff and board members: A foundations is permitted to pay staff and board members compensation for personal services performed in furtherance of its charitable mission. However, the IRS requires that any compensation be necessary as well as “reasonable.” Our optional compensation benchmarking service can help ensure that compensation levels are in line with industry norms and therefore more likely to be considered “reasonable.”

Resources:

Compensation Benchmarking

10 Rules Every Foundation Should Know About Compliance