IRS Revenue Procedure 82-39 specifies that grantmakers must use IRS Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, to verify a grantee's charitable status. In addition to listing charitable organizations, Publication 78 gives each one's foundation classification. A nonprofit's foundation classification identifies any deductibility limitations and whether private foundations making grants to the organization must exercise expenditure responsibility. (Expenditure responsibility essentially means ensuring that a grant is used for charitable purposes.)
Publication 78 is issued quarterly and updated weekly in the Internal Revenue Bulletin. The bulletin, however, addresses a range of matters, not just updates to Publication 78. Some weeks it contains no Publication 78 updates at all.
Although a nonprofit's GuideStar Premium report lists the organization's IRS subsection code—501(c)(3), 501(c)(4), and so forth—we obtain that information from the IRS Exempt Organizations Master Listing (also known as the IRS Business Master File or BMF), not Publication 78. GuideStar Premium also doesn't list a nonprofit's foundation classification. Therefore:
Researching a nonprofit's charitable status by using GuideStar Premium to identify its subsection code does not meet IRS requirements for verifying charitable status.
Another Reason You Don't Want to Use GuideStar Premium for Grantmaking Due Diligence
The Pension Protection Act of 2006 requires private foundations and organizations that sponsor donor-advised funds to determine if a grantee is a supporting organization before making a payout. A supporting organization is a 501(c)(3) public charity that supports another 501(c)(3) public charity. There are three types of supporting organizations; the Pension Protection Act restricts distributions to some of them and requires grantmakers to exercise expenditure responsibility over grants made to specific types of supporting organizations.
IRS Revenue Procedure 2009-32 defines three sources a grantmaker can use to research whether a grantee is a supporting organization:
- the grantee's current letter of determination;
- information from the BMF; or
- a third-party source of BMF data that meets specific conditions.
Although GuideStar Premium includes BMF data, it does not identify whether or not a charity is a supporting organization, and it does not contain all of the other information required for a third-party source of BMF information. Therefore:
GuideStar Premium does not meet IRS criteria for identifying supporting organizations.
Consequences of Not Performing Due Diligence or Using the Wrong Sources for It
If the IRS disallows a charitable distribution and it turns out that the grantmaker used the wrong sources for due diligence, did incomplete due diligence, or performed no due diligence at all, the grantmaking organization will be subject to excise taxes. In other words, failing to follow IRS procedures could cost your organization money.
A Simple Solution for a Complicated Process
GuideStar Charity Check is 100 percent compliant with IRS requirements for verifying charitable status and identifying supporting organizations. In addition, Charity Check confirms whether a grantee has been named on the OFAC list (the list of entities that may be associated with terrorism published by the Office of Foreign Assets Control at the U.S. Department of the Treasury). Charity Check will also flag nonprofits that have lost tax-exempt status for failure to file an annual return when that information becomes available.
GuideStar Charity Check lets you protect your organization from excise taxes while streamlining your due diligence. It's a win-win. What are you waiting for?
Learn more about GuideStar Charity Check
Suzanne E. Coffman, March 2011
© 2011, GuideStar USA, Inc.
Suzanne Coffman is GuideStar's editorial director and editor of the GuideStar Newsletter.