Donor-advised funds are generally separate accounts operated by tax- exempt public charities to receive contributions from a single donor or  group of donors. IRS oversight of tax-exempt entities generally relies on two activities. To describe the types of noncompliance and promotion methods involving  donor-advised funds and supporting organizations, we reviewed IRS  summaries of examination cases. Federal Laws and Regulations Impose Fewer Requirements on Donor-Advised Funds and Supporting Organizations and Their Donors, but Allow Donors Less Control Compared to Private Foundations

In recent years, donor-advised funds have become popular charitable- giving vehicles, and the number of supporting organizations has also  continued to increase. Supporting organizations are public charities that are to support one or  more public charities or certain other tax-exempt organizations. Donor-Advised Funds, Supporting Organizations, and Private Foundations Hold Billions of Dollars in Assets, but Some Organizational Characteristics Cannot Be Reliably Determined from Form 990 Data

Donor-advised funds hold billions of dollars in assets, and supporting  organizations and private foundations hold hundreds of billions of dollars  in assets. Using 2003 data from Forms 990 and 990-PF, we found differences  between supporting organizations and private foundations. Limited Data Are Available for Donor-Advised Funds

Data on donor-advised funds are limited because, unlike supporting  organizations and private foundations, the funds usually are not entities  that file a Form 990 to report their activities. Being able to make these  comparisons is important in order to address concerns, such as how much  and how often supporting organizations pay out to charities, since, like  private foundations, supporting organizations can be used to accumulate  contributions prior to distributing the money to charity, but, unlike private  foundations, they do not have a minimum payout requirement to support  charities that must be annually reported. In addition to financial characteristics such as payout rate and executive  compensation, organizational characteristics about supporting  organizations are difficult to determine from the Form 990. Some of these cases demonstrate clear  noncompliance, allowing IRS to propose appropriate corrective actions. Additionally, IRS contends with activities involving donor- advised funds and supporting organizations that do not violate laws or  regulations, yet do not seem to benefit charities. Some abusive schemes are organized or participated in  by professionals or entities who work in concert with the donor. IRS’s donor-advised fund and  supporting organization teams have investigated nine promoters involved  in potentially abusive schemes, according to IRS managers. However, IRS will not have  data that separate the fund activity from other activity. Recommendations for Executive Action

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, (1) require more comprehensive reporting of donor- advised fund activity, (2) require supporting organizations to report their  supported organizations’ EINs, and (3) require that the TINs for recipients  of large loans be reported, if IRS is granted authority to protect the TINs  from public disclosure. Charitable giving accounts that are held by a public charity.
Why GAO Did This Study

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.

What GAO Found

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.