United States Government Accountability Office

GAO Report to the Chairman, Committee on 

Ways and Means, House of 

Representatives 

TAX-EXEMPT 

ORGANIZATIONS 

Collecting More Data 

on Donor-Advised 

Funds and Supporting 

Organizations Could 

Help Address 

Compliance 

Challenges 

July 2006 

 

GAO-06-799 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 2006

TAX-EXEMPT ORGANIZATIONS

Collecting More Data on Donor-Advised 

Funds and Supporting Organizations 

Could Help Address Compliance 

Challenges 

Highlights of GAO-06-799, a report to the 

Chairman, Committee on Ways and 

Means, House of Representatives 

www.gao.gov/cgi-bin/getrpt?GAO-06-799.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 

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 Recommends

GAO suggests that Congress

consider (1) directing IRS to collect 

Form 990 data for, and provide 

guidance on calculating payout

rates for donor-advised funds and

supporting organizations, and (2) 

providing IRS authority to protect 

from public disclosure the taxpayer 

identification numbers (TIN) of 

loan recipients, so that IRS can 

collect the TINs on the Form 990. 

GAO recommends that IRS require 

(1) more comprehensive reporting

of donor-advised fund data, (2)

reporting of supported 

organizations’ identification

numbers, and (3) reporting of TINs 

for recipients of large loans, if 

granted authority to protect the 

TINs from public disclosure. 

IRS agrees with the first two 

recommendations but believes it 

needs legislative authority to

protect loan recipient TINs.

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 taxexempt 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. 
Contents 

Letter 1

Results in Brief 3

Background 5

Scope and Methodology 9 

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 11

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 16 

Private Benefit, Inurement, and Donor Control Have Been Found in 

Some Cases Involving Donor-Advised Funds and Supporting 

Organizations, with Promoters Sometimes Facilitating Schemes 25 

Conclusion 35

Matters for Congressional Consideration 36 

Recommendations for Executive Action 37 

Agency Comments 37 

Appendix I Tax-Exempt Excise Taxes 39 

Appendix II Summary Data Tables for Section 501(c)(3) TaxExempt Charities in 2005 Constant Dollars, Tax 

Years 1999-2003 44 

Appendix III Noncash Contribution Valuation Methods 48 

Appendix IV Methods and Materials Used to Market DonorAdvised Funds and Supporting Organizations to 

Potential Donors 51 

Appendix V Comments from the Internal Revenue Service 53 

Page i GAO-06-799 Tax Compliance
Appendix VI GAO Contact and Staff Acknowledgments 57 

Glossary 58 

Tables 

Table 1: Simplified Comparison of Differences and Similarities in 

Federal Tax Laws for Donor-Advised Funds, Supporting 

Organizations, and Private Foundations 12 

Table 2: Selected Financial Characteristics Reported by Supporting 

Organizations and Private Foundations in 2005 Constant 

Dollars, Tax Years 1999 and 2003 19 

Table 3: Medians and Related Data for Selected Financial 

Characteristics Reported by Supporting Organizations and 

Private Foundations in 2005 Constant Dollars, Tax Years 

1999 and 2003 20 

Table 4: Number of Returns Filed, Tax Years 1999 through 2003 44 

Table 5: Total Assets Reported by Section 501(c)(3) Organizations 

in Constant 2005 Dollars, Tax Years 1999 through 2003 44 

Table 6: Total Revenue Reported by Section 501(c)(3) 

Organizations in Constant 2005 Dollars, Tax Years 1999 

through 2003 45 

Table 7: Total Expenses Reported by Section 501(c)(3) 

Organizations in Constant 2005 Dollars, Tax Years 1999 

through 2003 45 

Table 8: Total Contributions Received Reported by Section

501(c)(3) Organizations in Constant 2005 Dollars, Tax 

Years 1999 through 2003 46 

Table 9: Total Noncash Contributions Received Reported by

Section 501(c)(3) Organizations in Constant 2005 Dollars, 

Tax Years 1999 through 2003 46 

Table 10: Total Grants Paid Reported by Section 501(c)(3) 

Organizations in Constant 2005 Dollars, Tax Years 1999 

through 2003 47 

Table 11: Total Executive Compensation Reported by Section

501(c)(3) Organizations in Constant 2005 Dollars, Tax 

Years 1999 through 2003 47 

Page ii GAO-06-799 Tax Compliance
Figures 

Figure 1: Simplified Example of How Donor-Advised Fund 

Accounts Operate 13 

Figure 2: Simplified Example of Governance and Structure of Type 

I, II, and III Supporting Organizations 14 

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Page iii GAO-06-799 Tax Compliance
United States Government Accountability Office

Washington, DC 20548 

July 27, 2006

The Honorable William M. Thomas 

Chairman 

Committee on Ways and Means 

House of Representatives 

Dear Mr. Chairman: 

Each year, millions of donors give hundreds of billions of dollars to 

charities.1

 The Internal Revenue Service (IRS) estimated that for tax year 

2002, charitable contributions totaled over $229 billion, the largest portion 

coming from individuals and foundations.2

 In addition to traditional public 

charities and private foundations, donors may make charitable 

contributions through the use of donor-advised funds and supporting 

organizations. Donor-advised funds are generally separate funds or 

accounts established and maintained by a public charity to receive 

contributions from a single donor or a group of donors.3

 While the donor 

may recommend charitable distributions from the account, the charity 

must be free to accept or reject the donor’s recommendations. 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. IRS has recognized that while the majority of taxexempt organizations are trying to comply with tax law, a significant 

compliance challenge involves the use of donor-advised funds and 

supporting organizations in abusive arrangements benefiting individuals or

organizations other than charities. Concerns about these abuses have led 

 1

Charities, recognized by Internal Revenue Code (IRC) section 501(c)(3), are exempt from

paying income taxes on the funds collected for charitable purposes. Charitable purposes 

include serving the poor and distressed; advancing religious, educational, and scientific 

endeavors; protecting various human and civil rights; and addressing various societal 

problems. Contributions to charities are tax deductible under IRC section 170. See glossary

for terms used throughout this report. 

2

The most recent IRS estimate available at the time of our review was for tax year 2002. We 

have converted IRS’s reported dollar amounts to 2005 constant dollars. 

3

The term donor-advised funds has been used to refer to both the individual accounts

donors establish, as well as the charities that maintain these accounts. For this report, we

will be using the terms donor-advised funds or donor-advised fund accounts to refer to the 

accounts that donors establish, unless otherwise noted. 

Page 1 GAO-06-799 Tax Compliance
to proposed legislation imposing requirements on the operation of donoradvised funds and supporting organizations. 

As requested, we are providing information on (1) federal laws and 

regulations regarding donor-advised funds and supporting organizations, 

as compared to private foundations;4

 (2) financial and organizational 

characteristics, such as loan recipients, of donor-advised funds, supporting 

organizations, and private foundations, to the extent data are available; 

and (3) types of potential or actual noncompliance and promotion 

methods involving donor-advised funds and supporting organizations and 

the challenges identifying them. In addition, we agreed to provide 

information about noncash contribution valuation methods and marketing 

methods involving donor-advised funds and supporting organizations, 

which are discussed in appendixes III and IV. 

To compare current federal laws and regulations for donor-advised funds 

and supporting organizations to those for private foundations, we 

reviewed the Internal Revenue Code (IRC), Department of the Treasury 

regulations, and IRS publications as they related to the purpose and 

operation of these entities. To determine financial and organizational 

characteristics of donor-advised funds, supporting organizations, and 

private foundations, we analyzed IRS Forms 990 and 990-PF5

 data, as well

as reviewed survey data that external organizations collected on donoradvised funds. Unless otherwise noted, tax year 2003 was the most recent 

year of data available at the time of our analysis. We converted 2003 dollar 

amounts to 2005 constant dollars. To identify types of noncompliance and 

promotion methods involving donor-advised funds and supporting 

organizations, we reviewed documents from IRS as well as from our 

literature search. For each objective, we spoke to various IRS managers 

and individuals knowledgeable about the tax-exempt community. We 

conducted our review from July 2005 through May 2006 in accordance 

with generally accepted government auditing standards. 

 4

Private foundations are defined by IRC as section 501(c)(3) domestic or foreign taxexempt organizations except those specifically excluded from the definition by section 

509(a), including universities, churches, and hospitals, and similar organizations that meet

a public support test or that support one of these organizations. 

5

IRS Forms 990 and 990-PF are federal information returns filed annually by tax-exempt 

public charities, such as supporting organizations, and private foundations, respectively. 

Information reported on these returns includes assets held, contributions received, and 

grants paid. 

Page 2 GAO-06-799 Tax Compliance
Although donor-advised funds, supporting organizations, and private 

foundations are all tax-exempt, charitable-giving vehicles, federal tax laws 

and regulations treat them differently. In general, donors who establish 

donor-advised funds and supporting organizations have less control over

the use of the charitable assets than those who establish private 

foundations, but they generally incur less administrative burden, receive 

less IRS oversight, have fewer limits in claiming charitable tax deductions,

and have fewer reporting requirements. Donor-advised funds, unlike 

supporting organizations and private foundations, are charitable-giving 

vehicles rather than entities and are not defined under federal law. 

Supporting organizations fall in between a donor-advised fund and a 

private foundation in terms of restrictions and sanctions versus control 

over the use of the charitable assets. The level of control that the 

supported charity has over the supporting organization varies, depending 

on the type of relationship between the two entities. Unlike donor-advised 

funds and supporting organizations, private foundations are not public 

charities. They also face more types of taxes and requirements, such as in 

annual reporting, making investments, and paying out funds.

Results in Brief 

Donor-advised funds hold billions of dollars in assets, and supporting 

organizations and private foundations hold hundreds of billions of dollars 

in assets. However, IRS data on donor-advised funds are limited because 

although organizations that maintain donor-advised funds are to file a 

Form 990 that includes financial data for all organizational activities, 

including for donor-advised funds, data on these funds are not readily 

identified from the form because these data are not separately reported. 

Limited data on donor-advised funds are available from annual surveys by 

The Chronicle of Philanthropy, even though these data are incomplete 

and only represent those who voluntarily responded.6

 For 2003, the 90 

survey respondents reported that their donor-advised fund accounts held

over $11.9 billion in assets and distributed over $2.2 billion to charities. 

Data from Forms 990 and 990-PF for 2003 showed differences between 

supporting organizations and private foundations. For example, in 2003,

supporting organizations held over $239.4 billion in assets and paid over 

 6

The Chronicle of Philanthropy is a newspaper that publishes articles about the taxexempt sector and is a source cited by IRS and others on the tax-exempt sector. Its most 

recent survey of donor-advised funds collected 2005 data, but in order to compare the data

to that for supporting organizations, we used 2003 survey data that we adjusted to 2005 

constant dollars. Results from this survey cannot be interpreted as being representative of

all donor-advised funds. 

Page 3 GAO-06-799 Tax Compliance
$10.7 billion in grants.7

 Private foundations held over $449.5 billion in 

assets in 2003 and paid over $31.0 billion in grants. Certain other 

characteristics cannot be reliably determined from Form 990. For 

example, supporting organizations are not required to compute and report 

a “payout” rate equivalent to that for private foundations. Questions have 

arisen about how much and how often supporting organizations pay out to 

charities because, like private foundations, some supporting organizations

can be used to accumulate contributions before distributing the money to

charity. Further, other organizational characteristics, such as detailed 

information on loan recipients and supported organizations’ identification 

numbers, are not readily identified from the Form 990. IRS revised the 

Form 990 for 2003 to include whether the Form 990 filer maintains donoradvised funds, and for 2005, the type of supporting organization in terms 

of its relationship to its supported organization. IRS is considering other 

Form 990 revisions for donor-advised funds and supporting organizations, 

but plans for making revisions are preliminary. 

Through examinations, IRS is finding evidence that some donors or related 

parties are exerting excess control over or receiving undue benefits from a 

donor-advised fund or supporting organization. For example, some donors 

to donor-advised funds and supporting organizations participate in 

schemes which allow them to regain their contribution, thus giving them a 

tax deduction on assets that did not actually go to charity. These 

examinations were not intended to be a statistically representative sample

and even when finished will not allow IRS to estimate the magnitude of 

noncompliance involving donor-advised funds and supporting 

organizations. Although the examinations have produced strong evidence 

of abusive schemes involving excess control and undue benefits, IRS faces 

challenges when identifying and examining noncompliance, namely the 

difficulty of gathering evidence on the facts and circumstances of some 

cases. IRS is also challenged by cases in which a donor-advised fund or 

supporting organization is compliant because no law or regulation is 

violated, but engage in activities that do not seem to benefit charity. For 

example, under certain circumstances, a market rate loan made to a 

 7

Beyond grants, supporting organizations can also provide support through other means,

such as providing direct services. At the time of our analysis, the most recent data available

were from 2003. For data that IRS did not transcribe, such as amount of grants paid for 

supporting organizations, we obtained the data from GuideStar. GuideStar is a nonprofit 

organization that transcribes data from Form 990 into searchable databases. IRS has not 

assessed in detail the quality of GuideStar’s data, but did include quality control provisions

in its contract with GuideStar. 

Page 4 GAO-06-799 Tax Compliance
donor, officer, or director from a supporting organization may not violate 

legal requirements applicable to public charities even though it may 

appear to be a conflict of interest and have no benefit to charity. Some 

abusive schemes are instigated or facilitated by entities or individuals, 

such as attorneys, accountants, and financial planners, who promote the 

schemes. Because of the potentially criminal and obscure nature of their 

activities, these entities and individuals are often difficult to identify and

investigate, which adds to the challenges in IRS’s examinations. 

Given the concerns about how much and how often donor-advised funds 

and supporting organizations are paying out their assets to charities, this 

report suggests that Congress should consider directing IRS to revise the 

Form 990 to collect sufficient information so that a consistent payout rate

can be calculated for both types of charitable-giving vehicles. This 

information could help inform decisions about whether to adopt a 

minimum payout requirement and if so, whether the required rate should 

be adjusted over time. To help IRS make these revisions, Congress should 

direct IRS about the types of support that should be included in the payout 

rate, as it has for private foundations. In addition, given the lack of data 

from the Form 990 to be used to determine certain characteristics of 

donor-advised funds and supporting organizations and the concerns about 

noncompliance involving these charitable-giving vehicles, we are making 

recommendations to IRS on collecting better data on the Form 990. IRS 

agreed with our two recommendations to require more comprehensive 

reporting of donor-advised fund data and to require supporting 

organizations to report their supported organizations’ employer 

identification numbers (EIN). However, IRS did not believe that it could 

implement our third recommendation to require reporting of loan 

recipients’ taxpayer identification numbers (TIN) without legislative 

authority to protect the TINs from public disclosure.8

 In response, we have 

revised our recommendation and, so that IRS can modify the Form 990 to 

require reporting of TINs of loan recipients from supporting organizations, 

we are also suggesting that Congress consider providing IRS authority to

protect that information from public disclosure. 

IRC section 501(c) specifies 28 types of entities that are eligible for taxexempt status and over 1.6 million entities have been recognized as 

exempt as of 2005. One subset of these tax-exempt entities is classified as 

Background 

 8

A taxpayer identification number (TIN) is generally a Social Security number for 

individuals or employer identification number for organizations. 

Page 5 GAO-06-799 Tax Compliance
501(c)(3) charitable organizations, of which slightly over 1 million existed 

in 2005, according to IRS. In 1969, Congress directed that all 501(c)(3) 

organizations would be private foundations unless they qualify for 

exclusion from that status under IRC section 509. This change subdivided 

section 501(c)(3) organizations into two general categories—”public 

charities” and “private foundations.” 

Within the public charities classification, Congress created supporting 

organizations, which are defined in section 509(a)(3) as public charities 

organized to support one or more public charities, including churches and 

certain governmental units, and certain other tax-exempt entities, such as 

membership-based organizations (e.g., unions and professional 

organizations). Supporting organizations are classified as public charities 

not because they are themselves publicly supported, but because they are 

to support another public charity with which they are to maintain a strong

relationship. In creating supporting organizations, Congress recognized 

that it can be beneficial and prudent to place certain assets or activities in 

a separate legal entity to insulate assets from liability or to facilitate 

separation of functions for programmatic, accounting, or other reasons, 

according to the Panel on the Nonprofit Sector Final Report.

9

Donor-advised funds are generally separate accounts operated by taxexempt public charities to receive contributions from a single donor or 

group of donors. Donors can advise on the distributions from the account. 

For the contribution to qualify as a completed gift, the charity must have 

ultimate control over how the assets in the account are invested and 

distributed. According to our interviews with knowledgeable individuals 

and recent Senate testimony, donor-advised funds have generally been in 

existence since the 1930s and have traditionally been operated by 

community foundations.10 In the 1990s, financial investment firms began 

establishing “commercial funds,” which are tax-exempt public charities 

that operate donor-advised fund accounts. Investment of contributions to 

the fund accounts is controlled by the commercial fund’s board, which 

 9

The Panel on the Nonprofit Sector Final Report was published in June 2005 and contains

recommendations for charitable reform. We discuss the Panel Report further in the 

Background section of this report. 

10Community foundations are charitable organizations established to hold funds 

contributed from a variety of sources and to use those funds to make charitable grants for

the benefit of the local community. See also U.S. Senate, Committee on Finance, statement 

of Jane G. Gravelle, Charities and Charitable Giving: Proposals for Reform, 109th Cong.,

1st session, April 5, 2005. 

Page 6 GAO-06-799 Tax Compliance
hires the investment firm that established the commercial fund to manage 

the fund’s assets. 

Generally, an entity must apply to IRS to obtain tax-exempt recognition.

Most organizations seeking recognition from federal income tax must use 

specific forms, including Form 1023 (Application for Recognition of 

Exemption under Section 501(c)(3) of the IRC) or Form 1024 (Application 

for Recognition of Exemption under Section 501(a)) as well as other 

documentation.11 After receiving tax-exempt recognition, public charitable

entities must annually file a Form 990 information return to report their 

financial transactions and activities for a tax year. Charities that have less

than $100,000 in gross receipts and $250,000 in year-end assets may use 

Form 990-EZ. Entities with gross receipts below $25,000, and certain types 

of entities, such as churches and certain entities associated with churches,

generally are not required to file. Form 990 collects information on 

revenues, expenses, and assets, and has accompanying schedules. 

Schedule A of Form 990 covers several areas such as compensation, 

lobbying expenditures, and revenue sources. Schedule B covers the source 

of contributions to charities and certain other exempt entities.12 Congress 

has granted public access to Form 990 data in recognition of the 

importance of public oversight to inform donors about how their money is

spent and to stem potential abuses. Private foundations, regardless of their 

amounts of gross receipts or assets, are required file a Form 990-PF 

information return annually. 

IRS oversight of tax-exempt entities generally relies on two activities. 

First, IRS reviews applications for tax-exempt status to determine whether 

a tax-exempt purpose is envisioned. IRS approves those applications that 

are properly completed and for which the applicant can demonstrate to 

the satisfaction of IRS that its activities or proposed activities meet the 

requirements of the section under which exemption is claimed. Second, 

IRS annually examines selected Forms 990 to determine whether the 

exempt entities meet various requirements (such as properly reporting 

 11Entities that are not required to apply include those that are not private foundations and 

that have gross receipts normally not more than $5,000, as well as churches and certain 

entities associated with churches. The other documentation to be submitted includes

organizing and enabling documents, such as the Articles of Incorporation, financial data 

and budgets, and a full description of its exempt purposes and activities. 

12In this report, when we refer to Form 990, we are also referring to Form 990-related 

schedules, such as Schedules A and B. 

Page 7 GAO-06-799 Tax Compliance
unrelated business income tax).13 In general, IRS attempts to select entities

that it believes are likely to have violated requirements. Based on 

examination evidence, IRS can accept the Form 990 as filed or change the 

status of the entity, impose excise taxes for certain types of violations, or 

revoke the exempt status if the violations are serious enough.14 As 

appropriate, IRS can also assess other types of taxes, such as employment 

taxes or unrelated business income taxes. 

In 2004, the Senate Committee on Finance asked a panel of experts to 

make recommendations to Congress to improve oversight, transparency, 

and governance in the tax-exempt sector. To do so, the Independent 

Sector15 convened a Panel on the Nonprofit Sector in October 2004, which 

included 24 nonprofit and philanthropic leaders.16 The Panel issued a final 

report in June 2005 with over 120 recommendations, several focusing on 

donor-advised funds and supporting organizations. On the basis of this 

report and other information, Congress has considered proposals to 

impose more restrictions and requirements on donor-advised funds and 

supporting organizations to better ensure that their contributions advance 

charitable rather than private interests and that their donors do not exert 

control or receive private benefits. Provisions in legislative proposals that 

apply to donor-advised funds have included providing a formal definition 

of a fund, setting minimum payout requirements, and placing restrictions 

on dealings with those who may privately benefit from charitable 

activities. Provisions related to supporting organizations have included 

those that would apply certain private foundation rules and restrictions, 

such as those on the annual payout requirement and excess business 

holding rules. 

 13Tax-exempt organizations are required to file a Form 990-T federal tax return and pay 

taxes on income of $1,000 or more earned from activities unrelated to their exempt 

purposes. 

14GAO, Tax-Exempt Organizations: Improvements Possible in Public, IRS, and State 

Oversight of Charities, GAO-02-526 (Washington, D.C.: Apr. 30, 2002) discusses IRS 

examinations of tax-exempt organizations and reasons for tax-exempt status revocation. 

15The Independent Sector is a national coalition of nonprofit organizations, private 

foundations, and corporate-giving programs that is to support the tax-exempt sector. 

16The Panel is assisted by over 100 executives of nonprofit entities and other experts on 

five work groups.

Page 8 GAO-06-799 Tax Compliance
To compare the federal laws and regulations on donor-advised funds and 

supporting organizations with those for private foundations, we reviewed 

the IRC, Treasury regulations, IRS publications, and various other 

documents describing these laws and regulations. We also interviewed 18 

IRS staff and 16 individuals knowledgeable about the tax-exempt 

community, such as attorneys and governmental-affairs managers at taxexempt entities, to obtain their input about these laws and regulations and 

our comparison of them. 

Scope and 

Methodology 

To determine financial and organizational characteristics of donor-advised 

funds, supporting organizations, and other tax-exempt charitable 

organizations, we obtained and analyzed IRS Form 990 and Form 990-PF 

data, as well as reviewed survey data on donor-advised funds that were 

collected by The Chronicle of Philanthropy. We used the surveys to obtain 

data on donor-advised funds because this information was not identifiable 

on the Form 990. To determine the reliability of the donor-advised fund 

data, we interviewed The Chronicle of Philanthropy staff about their 

survey methodology. To obtain supporting organization and other taxexempt charitable organization data fields, we obtained data from IRS’s 

Returns Inventory and Classification System (RICS) for tax years 1999 

through 2003, the 5 most recent years of data available at the time of our 

analysis. Because not all the data fields we wanted were available from 

RICS, we obtained additional Form 990 data fields from GuideStar, an 

organization that electronically captures Form 990 data for public access. 

To assess the reliability of the RICS and GuideStar data, we interviewed 

agency officials and conducted electronic data testing. In addition, we 

reviewed a selection of Forms 990 submitted to IRS to confirm that the 

values on the form matched those in the database. While we identified 

some minor discrepancies, we determined that the Form 990 data were 

sufficiently reliable for our purposes. The data files we obtained included 

the population of tax-exempt charities filing returns for those years, 

including supporting organizations and private foundations. Using 

computer software to analyze these data files, we determined summary 

statistics and converted dollar amounts to 2005 constant dollars. For our 

discussion on “payout” rate, compensation, and Form 990 revisions, we 

performed literature searches and interviewed 20 knowledgeable 

individuals from IRS’s Statistics of Income (SOI) program and Tax-Exempt 

Page 9 GAO-06-799 Tax Compliance
& Government Entities (TE/GE) division, Urban Institute, and 

Congressional Research Service (CRS).17

To describe the types of noncompliance and promotion methods involving 

donor-advised funds and supporting organizations, we reviewed IRS 

summaries of examination cases. To obtain anecdotal information about 

noncompliance involving donor-advised funds and supporting 

organizations, we also interviewed 4 managers at IRS who oversee 

examinations of donor-advised funds and supporting organizations and 7 

individuals knowledgeable about the tax-exempt community who work at 

organizations such as the Council on Foundations and the Independent 

Sector. We also interviewed 6 financial professionals and 11 community 

foundation managers on how donor-advised funds and supporting 

organizations are promoted to clients for abusive transactions. We also 

reviewed an IRS research report on developing abusive promoter leads 

through searching the Internet. 

To provide additional information on noncash contribution valuation 

methods (see app. III), we reviewed IRS publications and forms and 

interviewed an IRS field specialist working on valuation issues in the Large 

and Mid-Sized Business operating division. To obtain information on the 

marketing of donor-advised funds and supporting organizations (see app. 

IV), we spoke with 11 community foundation managers, 6 financial 

professionals, and 18 managers at IRS. The examples we discuss come 

from materials that we were referred to or located online based on our 

interviews, and do not necessarily represent all materials and methods 

used to market donor-advised funds and supporting organizations. 

 17IRS’s SOI program collects and processes tax data and annually publishes statistics 

related to the tax system. IRS’s TE/GE division covers the areas of employee plans, exempt 

organizations, and government entities. The Urban Institute is a nonpartisan public policy 

research center that operates the National Center for Charitable Statistics. CRS is the

public policy research arm of Congress.

Page 10 GAO-06-799 Tax Compliance
In recent years, donor-advised funds have become popular charitablegiving vehicles, and the number of supporting organizations has also 

continued to increase. At the same time, federal tax law generally imposes 

fewer restrictions and requirements on donor-advised funds and 

supporting organizations, but provides them and their donors less control 

over the use and investment of the charitable assets compared to private 

foundations; in fact, section 501(c)(3) and federal regulations do not 

specifically mention donor-advised funds. 

As a general principle, the more control that a donor has over the use of 

the charitable contributions and assets, the more regulations and 

restrictions apply. Table 1 discusses how federal tax law views donoradvised funds and supporting organizations compared to private 

foundations across a number of variables. 

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 

Page 11 GAO-06-799 Tax Compliance
Table 1: Simplified Comparison of Differences and Similarities in Federal Tax Laws for Donor-Advised Funds, Supporting 

Organizations, and Private Foundations

Donor-advised funds Supporting organizations Private foundations

Tax code treatment Although not statutorily defined, 

part of a public charity that 

operates funds as separately 

identified accounts. 

Public charities that carry out their 

charitable purpose by supporting 

other public charities. 

Charities that do not qualify as

public charities.

Filing requirement Fund administrators must apply for 

tax-exempt status and annually file 

Form 990 if annual gross receipts 

are over $25,000, indicating if they 

have separate accounts (on which 

separate Forms 990 are not 

required). 

Must apply for exempt status as a 

supporting organization. Must

annually file Form 990 if annual 

gross receipts are over $25,000. 

Must apply for exempt status as a 

private foundation. Must annually 

file Form 990-PF as well as 

schedules on the use, distribution, 

and investment of funds. 

Donor control Donors cannot have control but 

may advise on use of funds. 

Donors can be involved with boards 

but should not directly or indirectly 

control the boards. 

Donors and foundation's board 

have absolute control, such as

hiring staff and choosing charities 

to support. 

Donor tax

deductions

Follows rules for public charities. 

See "Supporting organizations." 

Donors may deduct up to 50 

percent of adjusted gross income 

for cash donations and up to 30 

percent of adjusted gross income 

for donations of capital gain 

property at fair market value. 

Donors may deduct up to 30 

percent of adjusted gross income 

for donations of cash and up to 20 

percent of adjusted gross income 

on capital gain property at cost 

basis. 

Excise taxation Follows rules for public charities. 

See "Supporting organizations." 

Subject to two excise taxes. Subject to six excise taxes. 

Payout rules None. None. Must meet annual minimum payout 

requirement. 

Association with

foreign entities 

Follows rules for public charities. 

See "Supporting organizations." 

May make grants to foreign 

organizations, but must ensure that 

funds are used for charitable 

purposes. 

Must follow more detailed rules 

than for public charities, including 

expenditure responsibility process. 

Source: GAO analysis of Internal Revenue Code, Treasury Regulations, and IRS Forms and Publications. 

Among the three types of charitable-giving vehicles, donor-advised funds 

allow donors to create a long-term vehicle for supporting charities with 

relatively less administrative burden because the fund is managed by a 

third party. Furthermore, donor-advised funds are not required to file 

separate tax returns, file for tax-exempt status, or adhere to private 

foundation rules. The donor can make a gift and take an income tax 

deduction for that tax year, and at that time or later, advise which charities 

should receive the distribution. However, in doing so, the donor gives up 

control over the distribution of the gift to charities. 

Page 12 GAO-06-799 Tax Compliance
Figure 1: Simplified Example of How Donor-Advised Fund Accounts Operate 

Source: GAO (analysis); Art Explosion (images).

Sponsoring organization distributes to recipient charities taking into 

consideration donor recommendation

$ $ $ $

$ $ $

$ $ $

Sponsoring 

organization 

Donors make contributions to fund accounts

Donoradvised fund

account

Donoradvised fund

account

Donoradvised fund

account

Supporting organizations are public charities that are to support one or 

more public charities or certain other tax-exempt organizations. They fall 

in between a donor-advised fund and a private foundation in terms of 

restrictions and sanctions versus donor control over the use of the 

charitable assets. For example, donors who create a supporting 

organization avoid private foundation excise taxes and other rules and 

face fewer restrictions on the deductibility of their donations at the 

expense of having less control compared to donors at a private 

foundation, such as involvement on the board. The level of control that the 

supported charity has over the supporting organization varies by the three 

basic types of supporting organizations. Type I supporting organizations 

are “operated, supervised, or controlled by” the supported charitable 

organization. Type II supporting organizations are “supervised or 

controlled in connection with” the supported organization. In contrast, 

Type III supporting organizations only are “operated in connection with” 

the supported organization (see fig. 2). 

Page 13 GAO-06-799 Tax Compliance
Figure 2: Simplified Example of Governance and Structure of Type I, II, and III Supporting Organizations

Board

Board

Type I

supporting

organization

Supported 

organization

$

Funds 

and 

services

• Supported organization 

board or general members 

are to appoint a majority of 

 the board members of the 

supporting organization, and;

• Supported organization has 

substantial degree of 

 direction over the policies, 

 programs, and activities of 

 the Type I supporting 

 organization.

Source: GAO (analysis); Art Explosion (images).

Persons controlling the supported 

organization should also control the 

supporting organization.

Board

Funds and services

Supported 

organization

Funds and services 

• The supported organization is to have a 

significant voice in directing the assets of the 

supporting organization, because one or 

 more of its officers or board appoints, serves 

as, or maintains a close working relationship 

 with supporting organization’s board 

 members, or;

• In the case of a supporting organization that 

 is a charitable trust, the supported 

 organization is a named beneficiary of the 

 trust and has the power to enforce the trust 

and compel an accounting, and;

• The supporting organization is to maintain an 

 integral or significant involvement in the 

supported organization’s affairs.

Board

$

$

Type I supporting organization Type II supporting organization 

Type III supporting organization 

Board Board

Supported 

organization

Type III

supporting

organization

Type II

supporting

organization

In reforming the rules for charitable organizations in 1969, Congress made 

changes to restrict and regulate private foundations more than public 

charities. Private foundations are generally funded and controlled by a 

single or small number of donors and therefore may be prone to potential 

Page 14 GAO-06-799 Tax Compliance
abuses, particularly by disqualified persons.18 As a result, private 

foundations are subject to anti-abuse rules and related sanctions that are 

not applicable to donor-advised funds, supporting organizations, and 

public charities as a whole. For example, public charities, including donoradvised fund operators and supporting organizations, are subject to 

restrictions and two related excise taxes for activities involving political

expenditures (section 4955) and excess benefit transactions19 (section 

4958). In contrast, private foundations are subject to six excise taxes20 for 

activities involving 

• investment income21 (section 4940); 

• self-dealing22 (section 4941); 

• failure to distribute income (section 4942); 

• excess business holdings (section 4943); 

• investments that jeopardize the charitable purpose (section 4944); and 

• certain “taxable expenditures” (section 4945). 

Although public charities, such as donor-advised fund operators and 

supporting organizations, and private foundations are subject to different 

restrictions on transactions with disqualified persons, both excess benefit 

and self-dealing restrictions are intended to prevent inurement or undue 

private benefit, which are prohibited for all section 501(c)3 organizations. 

Inurement is the transfer or use of the charity’s assets or income to or for 

the benefit of a charity’s insiders. All transactions that more than 

 18A disqualified person is an individual, defined in IRC section 4946, who may have a 

significant conflict of interest with a charity due to financial, executive, or voting powers, 

such as those held by donors, officers, or directors. The definition applies to individuals

involved with private foundations and supporting organizations, and has limited application 

to public charities other than supporting organizations. See section 4958. 

19An excess benefit transaction is a transaction in which an economic benefit is provided 

by an applicable tax-exempt organization, directly or indirectly, to or for the use of a 

disqualified person, and the value of the economic benefit provided by the organization 

exceeds the value of the consideration received by the organization. 

20See appendix I for a more detailed description of tax-exempt excise taxes.

21This excise tax is not related to any perceived abusive activity. 

22Self-dealing includes the following transactions, whether direct or indirect, between a 

private foundation and a disqualified person: (1) sale, exchange, or lease of property; 

(2) lending money or other extensions of credit; (3) providing goods, services, or facilities; 

(4) paying compensation or reimbursing expenses to a disqualified person; (5) transferring

foundation income or assets to, or for the use or benefit of, a disqualified person; and 

(6) certain agreements to make payments of money or property to government officials. 

Page 15 GAO-06-799 Tax Compliance
incidentally benefit insiders, other than reasonable compensation and 

arm’s length transactions, are prohibited inurement transactions. Private 

benefit is a broader concept, and may involve a transfer or use of a 

charity’s assets or income by private persons who are not necessarily 

insiders. Some private benefit may be allowed, but if present, must be no 

more than incidental to the exempt purpose being served. 

Unlike with donor-advised funds and supporting organizations, a private 

foundation is required under section 4942 to distribute annually a 

minimum amount of its funds, equal to approximately 5 percent of the fair

market value of the foundation’s noncharitable use of assets (generally,

stocks and other investments that compose the foundation’s endowment). 

In 1984, Congress passed legislation that clarified what expenses can be

included towards meeting this minimum “payout” requirement.23 If this 

“payout” rate is unmet, the foundation is subject to paying taxes on the 

undistributed amount. 

Donor-advised funds hold billions of dollars in assets, and supporting 

organizations and private foundations hold hundreds of billions of dollars 

in assets. Financial data on donor-advised funds are not separately 

identified and reported on the Form 990. Although some data on donoradvised funds have been collected through an annual survey, these data 

are incomplete and not statistically representative of the fund population.

Using 2003 data from Forms 990 and 990-PF, we found differences 

between supporting organizations and private foundations. For instance, 

in 2003, private foundations tended to report more total assets and 

contributions received but fewer revenues and expenses compared to 

supporting organizations. However, certain other characteristics of 

supporting organizations cannot be reliably determined from the Form 990 

because this information is either not required to be reported or may be 

misreported for various reasons, according to IRS. Specifically, supporting 

organizations are not required to report a payout rate or to pay out a 

minimum amount of funds to charities, as private foundations must do. 

IRS has recently revised the Form 990 to better identify supporting 

organizations and donor-advised funds and is considering additional 

revisions, but plans to further revise the Form 990 are still preliminary. 

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 

 23Pub. L. No. 98-369 (1984). 

Page 16 GAO-06-799 Tax Compliance
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. Organizations that maintain 

donor-advised funds are to file a Form 990 that includes the assets and 

other aggregate information for all activities, including for donor-advised 

funds, but data on these funds are not readily identified from the form 

because these data are not separately reported. 

Limited Data Are Available 

for Donor-Advised Funds 

To provide more information about donor-advised funds, The Chronicle of 

Philanthropy has been conducting an annual survey of organizations that 

maintain donor-advised funds. Started in 2000, the survey focuses on the 

largest donor-advised funds and collects data such as the total assets held

and the amount of grants awarded. For 2003, The Chronicle of

Philanthropy reported that the 90 organizations participating in its survey

held over $11.9 billion in assets and distributed over $2.2 billion to 

charities from their donor-advised fund accounts.24

However, these survey results, which are one of the few data sources 

available for donor-advised funds, do not represent the entire population 

of donor-advised funds and also have other data limitations.25 The survey 

does not try to capture information for all donor-advised funds, as the 

population of donor-advised funds to be surveyed is unknown, and focuses 

on the largest funds, such as the 50 largest community foundations, by 

amount of money raised. Also, while some efforts are made to generate a 

high response rate and to check unusual responses, the survey response 

rate has ranged between 53 percent to 57 percent. Further, survey 

respondents vary from year to year, and the data are self-reported and 

 24The Chronicle of Philanthropy’s most recent survey on donor-advised funds was

published in May 2006 and collected 2005 data. It reported that 88 organizations

participating in the survey held $15.5 billion in assets and distributed $3.3 billion to 

charities. We report 2003 survey data that we adjusted to 2005 constant dollars to be 

comparable to our other data. 

25We did not assess the reliability of the survey results from this and other studies on 

donor-advised funds. In addition to this survey, in 2001, the Council on Foundations

collaborated with the Columbus Foundation to survey donor-advised funds offered by 

community foundations. The Council on Foundations provides legal and other services

to its members and the general public. The Columbus Foundation is a community 

foundation serving central Ohio. In 2003, the Council on Foundations also collaborated on

a study on donor-advised funds focusing on donor preferences. Both of these studies can

be found at 

www.cof.org/files/Documents/Community_Foundations/CF_Columbus_DAF.pdf and 

www.cof.org/files/Documents/Community_Foundations/External_Reports/ 

FSG2_Oct2003.pdf. 

Page 17 GAO-06-799 Tax Compliance
cannot be checked for accuracy. Finally, the survey does not collect data 

for individual donor-advised fund accounts. 

Data on Supporting 

Organizations Highlight 

Differences from Private 

Foundations 

From our analysis of Forms 990 and 990-PF, we found that supporting 

organizations filed nearly 21,400 Forms 990, and private foundations filed

over 80,300 Forms 990-PF for tax year 2003.26 Table 2 summarizes 

differences in the amounts of assets, revenues, expenses, and 

contributions received when comparing 1999 and 2003. Appendix II 

provides additional related data, including data for the years 1999 through 

2003. 

 26Data for tax year 2003 were the most recent complete IRS and GuideStar data available at 

the time of our analysis. In our past work (GAO-02-526), we have reported that caution in 

interpreting the data is warranted. No measures are available on the accuracy of the 

expense data and substantial discretion in allocating the expenses makes use of the data 

problematic in comparing charities. 

Page 18 GAO-06-799 Tax Compliance
Table 2: Selected Financial Characteristics Reported by Supporting Organizations and Private Foundations in 2005 Constant 

Dollars, Tax Years 1999 and 2003 

(Dollars in billions) 

Supporting organizations Private foundations

Tax year Total

Percentage

 change Total 

Percentage

 change

Number of returns filed 1999 20,217 N/A 69,812 N/A

2003 21,372 6% 80,365 15%

Total assets 1999 $211.1 N/A $428.4 N/A a

2003 239.4 13% 449.5 5%

Total revenue 1999 63.0 N/A 84.6 N/A b

2003 65.0 3% 53.6 -37%

Total expenses 1999 50.0 N/A 40.6 N/A c

2003 55.6 11% 41.1 1%

Total grants paid 1999 8.5 N/A 32.4 N/A

2003 10.7 27% 31.0 -4%

Total contributions 1999 14.2 N/A 31.3 N/A

receivedd

2003 $15.5 9% $27.7 -12%

Source: GAO analysis of data from IRS’s Returns Inventory and Classification System and from GuideStar, 1999 and 2003. 

a

Total assets include cash and investments in securities, land, buildings, and equipment. 

b

Total revenue includes contributions received and dividends and interest earned from the investment

of securities. 

c

Total expenses include grants paid, executive compensation, salaries and wages, and other 

administrative expenses, which can be both program-related and nonprogram-related.

d

Total contributions received include direct contributions from individuals, indirect contributions 

through federated fundraising campaigns or affiliate organizations, and government grants. 

Table 2 shows that in 2003, the number of private foundations 

outnumbered the number of supporting organizations by more than a 

factor of 3, reported over $200 billion more in assets, and reported more 

contributions received. However, supporting organizations reported more 

revenue but also more expenses by 2003 compared to private foundations. 

Furthermore, comparing 1999 to 2003, supporting organizations tended to 

report growth in all of these areas while private foundations reported 

declines in revenue and contributions received. We were unable to 

determine the reasons for these changes, but the year-to-year variations

during 2000, 2001, and 2002, in part due to a significant stock market 

decline during this time, provided some insights (see app. II for summary 

tables with annual data). Median values for the dollar amounts reported 

are shown in table 3. 

Page 19 GAO-06-799 Tax Compliance
Table 3: Medians and Related Data for Selected Financial Characteristics Reported by Supporting Organizations and Private 

Foundations in 2005 Constant Dollars, Tax Years 1999 and 2003 

Tax year Supporting organizations Private foundations

Mediana

Percentage

change

Percentage

returns

reporting 

zerobMediana

Percentage

change

Percentage

returns

reporting 

zerob

Total assets 1999 $1,249,657 N/A 20% $392,542 N/A 5%

2003 1,221,457 -2% 18% 377,827 -4% 6%

Total revenue 1999 286,340 N/A 19% 66,180 N/A 5%

2003 196,376 -31% 17% 27,632 -58% 6%

Total 1999 164,172 N/A 21% 45,346 N/A 7%

expenses 2003 159,935 -3% 18% 41,019 -10% 6%

Total grants 1999 66,001 N/A 49% 41,538 N/A 19%

paid 2003 73,578 11% 46% 37,079 -11% 18%

Total 1999 141,474 N/A 55% 57,294 N/A 54%

contributions

received 2003 $133,474 -6% 53% $41,938 -27% 58%

Source: GAO analysis of data from IRS’s Returns Inventory and Classification System and from GuideStar, 1999 and 2003. 

a

Medians were calculated using returns reporting a nonzero value for the characteristic being 

analyzed. A median is the number above and below which 50 percent of organizations fall for the 

characteristic measured. We present the median because it better represents the typical organization 

than would the average, which could be affected by extreme dollar values for each measure. 

b

Although medians were calculated using returns reporting a nonzero value, we included, for context,

returns that reported a zero value for these characteristics. 

For the four financial characteristics listed in table 3, median values for 

supporting organizations were much higher compared to private 

foundations in both 1999 and 2003, in contrast to the higher total values 

for private foundations listed in table 2. Also, the declines in supporting 

organization median values between 1999 and 2003 were much less 

compared to private foundations. We excluded zero values from our 

median analyses. IRS officials said that organizations might be reporting 

zero values if filing a final return or for other reasons. However, we were 

unable to conduct additional analysis on these zero values, particularly for 

total contributions received in which over 50 percent of the values 

reported by supporting organizations and private foundations were zero. 

Page 20 GAO-06-799 Tax Compliance
Some financial characteristics of supporting organizations cannot be 

reliably determined because they are not required to be reported on the 

Form 990 or may be misreported. As a result, directly comparing 

supporting organizations and private foundations or other tax-exempt 

charitable organizations can pose challenges. 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.27

Some Financial and 

Organizational 

Characteristics of 

Supporting Organizations 

Cannot Be Reliably 

Determined from 990 Data 

Because supporting organizations do not have this payout requirement, 

they do not explicitly report a payout rate, as is required for private 

foundations. Certain lines on the Form 990-PF allow IRS, and the public, to

determine whether private foundations have met their required payout 

rate. For supporting organizations, factors that are included in the payout

calculation for private foundations might not be readily determined from 

the Form 990.28 Absent being able to identify these additional data and

clarifying how they are to be accounted for in a supporting organization 

payout rate, consistently comparing supporting organizations’ and private 

foundations’ payout rates cannot be done. Similarly, for donor-advised 

funds, payout rate has not been statutorily required or defined and 

consequently is also not required to be reported on the Form 990, and 

available data do not allow a payout rate to be determined. 

Despite these difficulties, researchers have studied different ways to 

compute a payout rate for supporting organizations. A 2005 Urban 

Institute study found that supporting organization payout rates could vary 

due to factors such as the purpose of the organization and which lines on

the Form 990 were included in determining how much support was 

 27Type III supporting organizations can demonstrate that they are an integral part of their 

supported organizations by paying substantially all—85 percent or more—of their income 

to, or for the use of, one or more of their supported organizations. The amount of support

provided must also be enough to ensure the attentiveness of these supported organizations. 

28Factors include administrative expenses, program-related investments, trustee fees, 

amounts set aside for future charitable projects, and monthly average of fair market value

of noncharitable use securities. 

Page 21 GAO-06-799 Tax Compliance
provided.29 The study pointed out that differences in supporting 

organization payout rates may reflect differences in the purpose and 

operation of the supporting organizations, rather than the amount of 

charitable support provided. For example, some supporting organizations 

provide operational services to their supported charities, rather than 

provide grants. Supporting organizations can serve to pool or manage 

investments or endowments for their supported organization, hold real 

estate, or provide services, such as office or property management. Payout

rates for these types of supporting organizations might indeed be low or 

infrequent, since these organizations do not hold and distribute charitable

funds like other supporting organizations or private foundations whose 

primary purpose is grant-making. 

While the Form 990 includes a supporting organization’s grants and net 

assets, using only those lines to determine a payout rate may provide an 

incomplete picture of the supporting organization’s charitable activity. In

2002, supporting organizations reported over $7 billion in grants as 

transfers of charitable support. However, in the Urban Institute study, 

researchers found that transfers of support from a supporting organization

to its supported organizations were reported on 1 or more of at least 10 

lines on the Form 990.30 While the amounts reported on these lines might 

include transfers of support, the Form 990 line data alone are generally not 

enough to determine how much of the amount reported, if any, supports 

charities. For example, they found that organizations they sampled 

sometimes reported transfers of support to a supported organization on 

the line for rental expenses. However, only by examining Form 990-related 

documentation, which an Urban Institute researcher said required 

considerable effort, could they determine this result. In 2003, supporting 

organizations reported over $431 million on this Form 990 line, but 

without significant effort, one cannot determine how much, if any, of this 

amount consisted of transfers of support to supported organizations. 

Another challenge in using Form 990 data to determine financial 

characteristics arises when analyzing compensation paid to executives and 

 29Thomas H. Pollak and Jonathan D. Durnford, The Scope and Activities of 501(c)(3) 

Supporting Organizations (Washington, D.C.: Urban Institute), June 2005, 

http://www.urban.org/url.cfm?ID=411175 (downloaded Aug. 8, 2005).

30As described by the Urban Institute, transfers of support are the flow of funds from the 

supporting organization to the supported organization, including grants, payments, and 

loans.

Page 22 GAO-06-799 Tax Compliance
employees of tax-exempt organizations, such as supporting organizations. 

In 1999 and 2003, supporting organizations reported over $894 million and 

over $1 billion, respectively, in total executive compensation. Private 

foundations reported almost $739 million in 1999 and about $812 million in

2003 in total executive compensation (see app. II for data tables). 

Organizations are required to report compensation for certain employees

on the Form 990 and Schedule A. However, according to IRS managers, 

misreporting is not uncommon, although some may be unintentional, in 

such areas as deferred executive compensation, payments made to 

relatives, and compensation paid from related entities, such as a for-profit 

subsidiary of a tax-exempt organization paying the salary of an employee 

or board member of its parent tax-exempt organization. In addition, an IRS 

researcher had concerns that compensation could be overreported for taxexempt organizations within a network, such as a health care network of 

hospitals. In such networks, which commonly include supporting 

organizations, compensation for board members can be misreported on 

the Forms 990 when related organizations have common board members. 

IRS is currently working on an initiative to identify and stop abuses by 

public charities and private foundations that pay excessive compensation 

and benefits to their officers and other insiders. Beginning in late 2004, IRS 

contacted a broad spectrum of over 1,800 public charities and private 

foundations seeking information about their compensation practices and 

procedures. IRS also just started a new phase of the initiative, involving an

additional 250 contacts about loans to officers, directors, and key 

employees. The goals for the initiative are to 

• learn how exempt organizations determine and manage compensation; 

• gauge the existence and effectiveness of exempt organizations’ 

controls over compensation issues; 

• learn how exempt organizations report compensation on Forms 990 

and 990-PF;

• address instances of questionable compensation practices, as well as 

compensation of specific individuals; and 

• increase exempt organizations’ awareness of compensation-related tax 

issues. 

The initial results of the compensation initiative will be included in a 

report that is expected to be completed in late August or September 2006. 

All examinations are expected to be completed by or during 2007. 

In addition to financial characteristics such as payout rate and executive 

compensation, organizational characteristics about supporting 

Page 23 GAO-06-799 Tax Compliance
organizations are difficult to determine from the Form 990. For example, 

Form 990 does not collect the EINs of their supported organizations, 

which according to IRS officials, would facilitate IRS’s ability to track the 

flow of donations. In addition, an IRS manager said that having supported 

organizations’ EINs would facilitate IRS’s ability to track how 

compensation is treated between supporting organizations and supported 

organizations. IRS emphasized that any form changes must be balanced 

against the increased burden on taxpayers of supplying additional 

information. 

Other organizational characteristics for which IRS collects limited data on

Form 990 include relationships with foreign entities, noncash

contributions, loan recipients, and donor information. We were unable to

closely evaluate these characteristics because IRS had limited data and 

information to provide and because of time constraints. Although the costs 

and burdens of collecting additional data to determine these 

organizational characteristics and protecting taxpayer privacy are 

legitimate concerns, IRS has acknowledged the need for greater 

transparency and better data to track the flow of funds between donors 

and charities. For example, IRS does not have TINs of loan recipients to 

track the flow of funds. 

IRS Has Made and Is 

Considering Changes to 

the Form 990 Regarding 

Donor-Advised Funds and 

Supporting Organizations 

IRS has begun to take steps to help address the lack of information 

reported on donor-advised funds and supporting organizations. For 

example, IRS has revised the 2005 Form 990 Schedule A to include a check

box to indicate whether a supporting organization is Type I, II, or III.31 This 

information will be transcribed into IRS’s electronic databases beginning 

in 2007, which, according to IRS, would allow it to better focus its 

examination and educational resources on compliance issues particular to

each type. Also, starting with the 2003 Form 990 Schedule A, organizations

must indicate whether they maintain separate accounts for donors, such 

as donor-advised funds. In January 2006, IRS began transcribing this 

information, which is a first step towards identifying how many and which 

charities have donor-advised funds. However, these organizations are not

required to separately report data on the donor-advised funds from the 

other activity reported on the Form 990, meaning that data on the funds 

are not easily identified. While IRS is considering revising the Form 990 to 

include more information about donor-advised funds, it does not have 

 31Supporting organization type is now also being indicated on IRS’s determination letters. 

Page 24 GAO-06-799 Tax Compliance
details on what data they might collect or how or when they would revise 

the form. 

IRS is considering additional changes to the Form 990 that, pending 

management approval, would include reorganizing the form in stages. A 

pending proposal includes recommendations to create new sections or 

schedules on the Form 990 with questions on donor-advised funds and 

supporting organizations. Because the Form 1023 asks questions regarding 

donor-advised funds and supporting organizations, the proposal 

recommends aligning the Form 990 with Form 1023 so that IRS can track a 

charity from its formation. If the recommendation is approved, IRS’s Form 

990 Redesign Team plans to rewrite the Form 990 instructions and add a 

glossary consistent with the Form 1023 which, according to IRS, may 

provide better data. 

According to IRS staff and others we interviewed, these form revisions, 

along with increased use of electronic filing, could improve the quality of

data available to IRS to better identify noncompliance through its research 

and compliance efforts, as well as to the public to improve the 

effectiveness of tax-exempt charitable organizations. 

IRS program managers report that some donor-advised funds and 

supporting organizations cases highlight concerns about private benefit, 

inurement, and donor control. Some of these cases demonstrate clear 

noncompliance, allowing IRS to propose appropriate corrective actions. 

However, IRS is confronted with many cases that require detailed 

assessments of evidence, which makes addressing noncompliance 

challenging. Additionally, IRS contends with activities involving donoradvised funds and supporting organizations that do not violate laws or 

regulations, yet do not seem to benefit charities. Entities or individuals, 

such as financial advisers or attorneys, sometimes facilitate abusive 

schemes, introducing additional complexities to IRS’s examination 

process. 

Private Benefit,

Inurement, and Donor 

Control Have Been 

Found in Some Cases 

Involving DonorAdvised Funds and 

Supporting 

Organizations, with 

Promoters Sometimes 

Facilitating Schemes 

Page 25 GAO-06-799 Tax Compliance
Private benefit, inurement, and donor control are common concerns for 

IRS in examinations of potential noncompliance involving donor-advised 

funds and supporting organizations. IRS is unable to provide estimates 

about the prevalence of this noncompliance, and noncompliance in 

general. Thus, the examples presented are intended to illustrate known 

cases of private benefit and donor control, and do not represent the entire

range of noncompliance.32

Private benefit occurs when a 501(c)(3) organization is not operated or 

organized exclusively for exempt purposes because it serves a private

rather than public interest. Because they are subject to section 501(c)(3), 

both donor-advised funds and supporting organizations must avoid private 

benefit that is more than incidental to the charitable purpose being served;

if private benefit is substantial enough, it may jeopardize an organization’s 

tax-exempt status. If the organization’s assets or income are transferred to 

an individual who is a charity insider, the benefit is called “inurement.”33

Private benefit and inurement schemes involving donor-advised funds and 

supporting organizations may benefit various individuals and may vary in 

complexity.

Private Benefit, Inurement, 

and Donor Control Are 

Prevailing Concerns in 

Donor-Advised Fund and 

Supporting Organization 

Noncompliance Cases 

Private Benefit and Inurement 

Lead to Personal Gains 

IRS has encountered multiple cases of private benefit where donors to 

donor-advised funds are able to regain some or all of their contribution. 

For example, IRS has concerns about one fund offering a “loan program,” 

where donors were able to repossess their donation, with no obligation for 

repayment. IRS also sees inurement cases, in which individuals other than

the donor receive private benefit. For example, IRS is examining one 

exempt organization and donor-advised fund operated by a for-profit 

company. The company offered the fund as a charitable giving vehicle for

its employees. The exempt organization lacked an independent board, 

with the president–who also served as president of the for-profit 

company–receiving potentially high commissions and fees from contracts 

with the donor-advised fund. 

 32All examples in this section are from ongoing or past IRS investigations, and were 

described by IRS officials.

33A charity insider is an individual such as an officer, board member, or other persons able

to exercise substantial influence over a tax-exempt organization. Donors to donor-advised 

funds are rarely considered to be insiders, while donors to supporting organizations can be

insiders, for example, if they also serve on the supported organization’s board. 

Page 26 GAO-06-799 Tax Compliance
While donor-advised fund schemes often involve private benefit, schemes 

involving supporting organizations more often result in inurement and are 

typically more complex, according to IRS management. Schemes can 

involve direct payment of benefits to donors or, more indirectly, payments 

routed through offshore entities. One direct payment scheme, designed to 

benefit a donor’s children, funneled school tuition payments through a 

supporting organization intended to support their child’s school. More 

complex schemes enable the donor to regain his or her donation after it is

routed offshore. One typical scheme begins with a donation to a 

supporting organization, which is then transferred to an account in an 

offshore investment firm controlled by a financial planner, accountant, or 

other knowledgeable insider working with the donor. The money is then 

transferred to a domestic mortgage lender, also controlled by the insider, 

giving the donor access to the money for use toward an interest-only 

mortgage. As a result, the donor benefits from a tax deduction on his or 

her contribution, while still retaining access to the donation. To justify the 

scheme, the supporting organization claims that earnings from their 

investment in the offshore firm will benefit charity. 

Donor control arises when a donor holds authority that exceeds what is 

permissible for donor-advised funds or supporting organizations. Illegal 

control can occur when a donor or disqualified person has control over 

the charity’s assets, operations, or governance, or the organizations 

receiving support.34 It is possible for donor control to occur without 

private benefit. A donor may control a function or operation of a 

supporting organization or donor-advised fund without receiving benefits,

according to IRS management. Donor control involving donor-advised 

funds and supporting organizations manifests in different ways. 

Donor Control May Involve 

Assets or Charity Operations 

Donor control of a donor-advised fund occurs when the donor oversteps 

his or her advisory role and retains ultimate authority over the distribution 

of fund assets. One IRS manager told us that, although more common in 

supporting organization cases, a donor-advised fund donor may also 

achieve control by controlling the exempt organization receiving the 

benefits of their donation. For example, IRS is pursuing a case where a 

donor-advised fund appears to be making distributions to a public charity, 

which is controlled by the donor-advised fund’s donor. If the donor-

 34In order for a charitable contribution to be considered a donation eligible for a tax 

deduction, the donor must relinquish control of the asset. IRC section 170 defines 

charitable contributions and provides the rules and limits for tax deductions for individuals

and corporations.

Page 27 GAO-06-799 Tax Compliance
advised fund did not exist, the public charity recipient would likely be

classified as a private foundation. IRS is investigating whether the charity 

has other support sources. 

For supporting organizations, control of the organization’s board or the 

donor’s ability to designate charitable recipients can constitute donor 

control.35 Board control can occur directly by controlling more than 50 

percent of board voting power or veto power granted to disqualified 

persons. Alternatively, board control can occur indirectly through a 

disqualified person influencing board members who are not disqualified 

persons, according to IRS managers. Retaining access to assets can also 

signify direct or indirect control of a supporting organization. In one case, 

IRS has questioned whether or not a donor controlled the operations and

investments of the supporting organization that the donor founded, 

although the donor did not receive private benefit. Donor control can also 

occur indirectly through control of an asset donated to the supporting 

organization. For example, in one case, IRS is concerned that a donor is 

continuing to collect and retain rent from building tenants after the 

building was donated to a supporting organization. 

Although private benefit, inurement, and donor control are reoccurring 

themes in IRS’s caseload, other types of noncompliance involving donoradvised funds and supporting organizations can occur. Specifically, a 

supporting organization could fail to maintain a relationship with its 

supported organization(s).36 A representative from the tax-exempt 

community told us of situations where charities listed as supported 

organizations were unaware of a purported relationship with a supporting 

organization. The Panel on the Nonprofit Sector also recognized this 

problem in its June 2005 report. Similarly, IRS managers told us that a 

major issue in supporting organization examinations is whether or not the 

organization maintains a sufficient relationship with its supported 

organization. Form 990 only requires that supporting organizations report 

the name of their supported organizations; it does not require them to 

report the EIN of the supported organization. IRS managers told us that 

Other Types of Noncompliance 

Exist 

 35Definitions of “control” and the limits of power for disqualified persons are found in

Treas. Reg. §1.509(a)-4(j)(1). Also see Rev. Rul. 80-207 for analysis of indirect influence on 

a board. 

36Because of required structures and board oversight for Type I and II supporting 

organizations, this problem is more likely for Type III supporting organizations. 

Page 28 GAO-06-799 Tax Compliance
not knowing the EIN makes it harder for IRS staff to track the relationship 

between the two organizations. 

IRS uses resources from a variety of units to identify and examine 

noncompliance involving donor-advised funds and supporting 

organizations. Toward these ends, IRS created two teams, one on donoradvised funds and one on supporting organizations.37 As of June 2006, the 

donor-advised fund team had opened but had not yet closed 27 

examinations, according to an IRS manager.38 As of June 2006, the 

supporting organization team had opened 102 examinations and closed 20 

of them; 18 of which were found to be noncompliant, according to IRS. 

IRS managers also told us that other programs–including the Tax 

Examination Program and the Excessive Compensation Program–have 

also examined and closed supporting organization cases, and are currently

examining 655 supporting organizations.39

IRS Has Various Efforts to 

Identify and Correct 

Noncompliance, but Does Not 

Know the Rate of 

Noncompliance 

Regardless of the type of noncompliance found, IRS can propose 

corrective actions when the evidence shows that a law or regulation has 

been unmistakably violated. IRS is developing criteria for proposing 

corrective actions for donor-advised funds as the related team finishes its 

examinations; many of the examinations are in the early stages. For 

supporting organization cases, IRS officials said, in general, they will 

propose a change to private foundation status for issues of donor control. 

Intermediate sanctions or revocation of the tax-exempt status are typically 

proposed for inurement cases, according to IRS.40 Criminal charges may be

brought upon individuals found to be exhibiting criminal behavior while 

 37Each team will report on noncompliance trends and possible regulatory or legislative 

actions. The donor-advised fund team, which formed in 2002, plans to issue a report by the 

end of 2006, according to an IRS manager. The supporting organization team, which formed 

in 2003, told us it plans to issue reports–the first of which would be released in August 2006

and the last of which would be released at the end of fiscal year 2007–on each of the three 

waves of cases they are investigating. 

38The 27 examination cases involved 27 tax returns for 22 different organizations. 

39Between October 1, 2001, and September 30, 2005, these other IRS units have closed 715

cases involving supporting organizations, 400 of which were found to be noncompliant. For 

fiscal year 2006, 94 cases have been closed so far; 64 of which were found to be 

noncompliant.

40“Intermediate sanctions” in this context generally refers to excise taxes paid by a 

disqualified person receiving private benefit or a charity manager with knowledge of a

scheme, as defined in IRC section 4958. IRS officials said that, in the most egregious cases, 

IRS may recommend intermediate sanctions in conjunction with revocation of the

supporting organization’s tax-exempt status. 

Page 29 GAO-06-799 Tax Compliance
participating in abusive schemes, and may occur in conjunction with 

corrective actions resulting from examinations. In cases where the donoradvised fund or supporting organization is believed to be beneficial overall 

but needs correction in order to be fully compliant, IRS managers told us 

they may also initiate a closing agreement, which provides a set of 

requirements intended to correct flaws in the donor-advised fund or 

supporting organization structure or operations. 

For various reasons, IRS does not know the overall rate of noncompliance 

or the prevalence of different forms of noncompliance involving donoradvised funds and supporting organizations. First, IRS did not use a 

random sample to identify cases for examination. Instead, it used methods 

that led to examining the most egregious noncompliance schemes. For 

example, the manager for the donor-advised fund team told us it selected 

cases for examination based on large asset size or other unusual 

characteristics, such as high compensation or high fees.41 Supporting 

organizations cases were selected based on referrals from other IRS units, 

according to the team’s manager. Second, IRS has no established 

population of donor-advised funds for which to estimate a noncompliance 

rate. An IRS manager said IRS is unable to identify the population because 

exempt organizations have not been required to report their use of donoradvised funds, which prevents IRS from employing statistical sampling 

methodology to estimate donor-advised fund noncompliance. Third, 

examinations by IRS’s teams are relatively new; examinations began in 

2005 for donor-advised funds and began in 2004 for supporting 

organizations, according to IRS managers.42

IRS Faces Challenges in 

Addressing 

Noncompliance Involving 

Donor-Advised Funds and 

Supporting Organizations 

Not all cases involving donor-advised funds and supporting organizations 

are clear; IRS faces challenges in identifying and examining potential 

noncompliance. In part, these challenges are due to uncertainty about 

whether the evidence unequivocally points to noncompliance, and to the 

difficulty in exhaustively collecting evidence on the facts and

circumstances of a case.

 41IRS identified donor-advised funds for potential examination using (1) data from IRS’s

Rulings and Agreements office, which assesses organizations’ applications for tax-exempt 

status, and (2) outside sources, including The Chronicle of Philanthropy.

42Although the donor-advised fund and supporting organizations teams began in 2002 and

2003, respectively, examinations did not begin until later. 

Page 30 GAO-06-799 Tax Compliance
To evaluate facts and circumstances, IRS managers said that agents may 

evaluate minutes of meetings, correspondence among trustees, contracts

or agreements on loans or rent, news articles, or the organization’s trust 

document. Although exempt organizations must maintain documentation

that they operate exclusively for exempt purposes, the existence and

quality of these documents may differ among organizations, according to

IRS managers. Therefore, IRS may need to collect evidence that is time- or 

resource-intensive to uncover. Evidence that does not readily exist or that

is difficult to uncover, combined with the practical limits of the 

examination process, make some noncompliance nearly impossible to 

detect, as the following examples illustrate. 

• In determining influence on or control of a board, regulations define 

permissible relationships between disqualified persons and supporting 

organization boards. Despite regulatory guidance, IRS is unable to 

identify all noncompliant situations because it cannot always identify 

influence on board members by disqualified persons, especially when 

attempting to identify a disqualified person’s indirect influence. 

Nomination of a majority of board members by a disqualified person 

may signify this influence, but IRS cannot consistently track the 

origination of a board nomination. Only in some cases are trust 

documents and meeting minutes available that may document the 

nomination process, according to IRS. Additionally, IRS may have 

difficulty identifying a disqualified person’s indirect influence on a 

board when this influence may occur in private conversations. 

• It may also be challenging to find evidence that ensures that donoradvised funds are operating on “donor advice” rather than “donor 

control.” To establish that donors are not exercising undue control, IRS 

may examine the process by which a donor makes a funding 

recommendation, according to the manager of IRS’s donor-advised 

fund team. Specifically, IRS managers said this examination could 

include verification of an independent board, the process by which the 

fund operator investigates donor recommendations or provides 

documents that show that a donor’s recommendations are not all 

accepted. However, similar to the challenges of identifying board 

control, IRS may not be able to detect subtle coercion occurring in 

payout decisions. 

• Detecting control of assets may also be difficult. For example, a donor 

may contribute a large portion of interest in a business partnership to a 

Page 31 GAO-06-799 Tax Compliance
supporting organization.43 The donor, serving as the business’s general 

partner, retains some ownership of the partnership and has a 

management responsibility or controls voting stock. According to an 

IRS manager, unless the supporting organization has other assets, this 

situation would likely allow the donor to have effective control over 

the assets of the supporting organization. In some situations, the 

business may claim that the general partner lacks controlling power, in 

which case IRS managers said examiners must rely on available 

evidence, such as partnership agreements, to determine the 

donor/partner’s control over the business. Once again, evidence of 

more subtle control may not be available or practical for IRS to pursue. 

Some Compliant Activities 

Involving Donor-Advised 

Funds and Supporting 

Organizations Do Not 

Seem to Benefit Charity,

Thus Introducing Areas for 

Potential Future Scrutiny 

Not all cases involving donor-advised funds and supporting organizations 

are clear cases of private benefit, inurement, or donor control, or involve 

the challenges of gathering evidence. IRS managers said they encounter 

scenarios where no statute or regulation was violated, but where activities

involving donor-advised funds or supporting organizations do not seem to 

benefit charity. In these situations, noncompliance cannot be alleged, but 

IRS may still question an organization’s or individual’s charitable 

purposes. A general lack of data as well as a lack of legal definitions and 

regulations for donor-advised funds contribute to these uncertainties for 

IRS, which have prompted both IRS and Congress to consider different 

solutions for reform, as the following examples illustrate. 

• One IRS manager told us that IRS is uncertain about whether or not 

donor-advised funds with low payout rates are supporting charitable 

purposes. No laws or regulations require annual minimum payouts to 

charities from donor-advised funds, but according to IRS management, 

idle assets are unlikely to result in benefits. Conversely, a donoradvised fund may be idle in paying out to build an endowment. If a 

supporting organization has a low payout rate, however, IRS said this 

can sometimes signify that it is not fulfilling its requirement. Legislation 

has been introduced in Congress to impose a minimum payout on 

donor-advised funds and supporting organizations. As of early July 

2006, legislation on this issue had not passed. 

• IRS managers told us that examiners have discovered loans made from 

a supporting organization to a donor or insider. Loans made by public 

 43A donor-advised fund can receive a donation of interest in a partnership, but the legal 

analysis required to determine donor control differs from that for a supporting 

organization. 

Page 32 GAO-06-799 Tax Compliance
charities to officers, directors, donors, and others are legal, provided 

that they are repaid and not made at terms lower than the market rate.44

According to IRS, charities could justify these loans as an investment. 

However, these loans may carry risk or introduce a conflict of interest. 

For example, if a borrower has some form of control over the 

organization, such as that of a board member or executive, it is less 

likely that the organization will take legal action if the loan is not 

repaid. Also, loans may prevent assets from being paid out to charitable 

purposes. Furthermore, if a loan is made as part of an employee 

compensation package, in some cases it may be classified as an excess 

benefit under IRC section 4958, according to IRS management. 

Additionally, these loans may signify control by disqualified persons. 

Even if a loan’s interest rate is reasonable, or the borrower is not an 

employee or in control of the organization, the terms of the loan may 

give a borrower other benefits, thus making a case that the 

organization serves private rather than public purposes. In recognition 

of such potential improprieties, 19 states have banned such loans, 

according to The Chronicle of Philanthropy. As part of a broader study 

of executive compensation at public charities, IRS is examining loans 

made to insiders, but is not specifically focusing on supporting 

organizations. 

Promoters May Aid in 

Abusive Schemes, and May 

Be Difficult to Identify and 

Examine 

In addition to examining donor-advised funds, supporting organizations, 

and donors, IRS investigates the promoters—creators and facilitators of 

abusive schemes. Some abusive schemes are organized or participated in

by professionals or entities who work in concert with the donor. 

Identifying and examining the roles of these professionals or entities can 

be difficult and therefore may exacerbate the challenges in examining 

donor-advised fund and supporting organizations cases. 

A promoter is an individual or entity that organizes or assists in the 

organization of a partnership, trust, investment plan, or any other 

arrangement to be sold to a third party and designed to be used or is 

actually used in obtaining illegal tax benefits.45 Accountants, financial 

planners, attorneys, community foundations, and tax preparers could 

 44IRS encounters transactions between supporting organizations and donors that are

labeled as “loans” but do not result in repayment. These transactions are likely cases of 

inurement and are a separate issue from true loans, which result in repayment. As 

described in IRC section 4941, loans made from a private foundation to a disqualified 

person are subject to excise taxation. 

45The definition of promoters is for purposes of IRC section 6700. 

Page 33 GAO-06-799 Tax Compliance
serve as promoters, and may not just be involved in schemes involving 

exempt organizations. Cases involving promoters address both the 

material used to promote noncompliance, which must adhere to tax law, 

as well as the actual activities implementing a scheme.46 Because 

promoters may be committing fraud, promoters could face criminal 

charges. See appendix IV for a discussion of materials and methods for 

publicizing donor-advised funds and supporting organizations which are 

not intended to lead to abusive schemes. 

According to IRS managers, some schemes, particularly those benefiting

high-income donors, originate with a financial planner, accountant, or 

lawyer. Other promoters may play a role in facilitating schemes, such as 

the mortgage inurement scheme previously described in this report. 

According to the manager of IRS’s donor-advised fund team, promoters 

are typically more involved in schemes involving supporting organizations 

than donor-advised funds due to the complexity of supporting 

organizations’ schemes. 

For some cases IRS is able to identify the promoter, noncompliant 

material, and transactions that promote noncompliance.47 For example, 

material from a financial planner offered a hypothetical estate plan 

proposing that a supporting organization hold a wealthy donor’s personal 

assets, thus facilitating a reduction in estate taxes upon the donor’s death. 

The plan proposed transferring land owned by the donor to the supporting 

organization, who would offer the sale of the land to the donor’s heirs at 

about 10 percent of its fair market value. Furthermore, the plan proposed

that the supporting organization also lease the estate assets back to the 

donor’s business. If the plan were carried out, inurement, private benefit, 

excess benefit, and donor control would be significant legal concerns. 

However, according to IRS managers identifying and investigating 

promoters is often challenging. IRS managers said they rely on referrals 

and Internet searches to find promoters. Although some promoters 

advertise on the Internet, they may sometimes only share details about the 

promotion in conversations with a donor. IRS’s donor-advised fund and

supporting organization teams have investigated nine promoters involved 

in potentially abusive schemes, according to IRS managers. In addition to

 46Promoters are subject to laws prohibiting the promotion of abusive tax structures,

covered in IRC sections 6700 and 6701. 

47IRS is unable to determine the extent of the role of promoters in noncompliance. 

Page 34 GAO-06-799 Tax Compliance
the work of the issue teams, IRS’s civil Lead Development Center is tasked 

with identifying promoters and coordinating promoter investigations. IRS

managers told us that once IRS identifies potential promoters, examiners 

must seek information that is typically carefully hidden among complex 

transactions involving multiple entities. This requires that IRS carefully 

craft document requests and summonses, which can be a lengthy process.

Furthermore, once IRS refines its examination process to target certain

schemes, promoters quickly alter their approaches. 

Finally, like some of the cases described earlier in this section, some 

marketing material may not violate a law or regulation, but may have a

questionable purpose which may indicate potential noncompliance by

misleading donors with incomplete information. This may occur when 

marketing material may be providing incomplete information on the limits 

of donor-advised funds and supporting organizations versus private 

foundations. We found examples of Web sites that describe a donoradvised fund or supporting organization as a giving option with all the 

benefits and advantages of a private foundation, which may mislead 

potential donors into believing they can retain control over their donation.

Donor-advised funds, supporting organizations, and private foundations 

are vehicles for charitable giving. Donors can use these approaches for 

long-term giving or to accumulate assets to address some larger need. 

They also may create donor-advised funds or supporting organizations to 

avoid the costs, burdens, excise taxes, and restrictions associated with 

private foundations. 

Conclusion 

However, concerns have been expressed about the potential for abuses by 

those who create and operate donor-advised funds and supporting 

organizations, prompting legislative proposals to deter abuses. IRS has 

found examples of abuses in these funds and organizations involving those 

who do not give up control of their donations and who benefit privately at 

the expense of the charitable interest. Although IRS has efforts to focus on 

such abuses, IRS examiners lack sufficient data, which complicates efforts 

to identify and address the noncompliance. 

Congress is considering proposals to require donor-advised funds and 

supporting organizations to annually pay out a certain percentage of their 

assets to serve charities, which would roughly mirror the requirement for 

private foundations. However, no defined way exists to calculate a payout 

rate for these funds and these organizations, and current Form 990 data do

not allow for full or consistent analyses of the payout rate for donoradvised funds or supporting organizations. Guidance is needed on what 

Page 35 GAO-06-799 Tax Compliance
types of support should be included in a payout rate so that the Form 990 

collects the necessary data. If a payout rate requirement is not adopted,

these Form 990 requirements would provide data to inform future 

congressional decisions about whether a requirement should be instituted. 

If a payout rate is adopted, the data would help in tracking compliance and 

determining whether the requirement may need to be adjusted. 

Collecting payout information on the Form 990, however, would not be 

possible for donor-advised funds due to limitations in annual Form 990 

reporting. Starting in tax year 2003, IRS has been able to identify Forms 

990 that report donor-advised fund activity. However, IRS will not have 

data that separate the fund activity from other activity. Adding a 

requirement to separately report the donor-advised fund activity from 

other activity on the Form 990 would allow IRS to check the payout rate as 

well as other fund activity that looks suspicious. 

IRS also has concerns with supporting organizations that do not support 

their supported organizations or that make loans to individuals or 

organizations. IRS would be better able to track the flow of funds to the 

charities to be supported and loan recipients if it knew their TINs, which 

are generally Social Security numbers for individuals or EINs for 

organizations. Collecting the TINs of loan recipients raises concerns about 

the potential costs and burdens and the protection of the TINs from 

unauthorized use. IRS could address these concerns by only requiring TIN 

reporting for loans above a certain dollar threshold and by not making the 

information publicly available. If the Form 990 is changed to separately

report data on donor-advised fund activity, IRS should consider extending

this TIN reporting to donor-advised funds. 

Given the concerns about payout rates for both donor-advised funds and 

supporting organizations, Congress should consider directing IRS to revise 

the Form 990 to collect sufficient information so that a consistent payout 

rate can be calculated for both types of charitable-giving vehicles. This 

information could help inform decisions about whether to adopt a 

minimum payout requirement and if any required rate should be adjusted. 

To help IRS in making these revisions, Congress should direct IRS about 

the types of support that should be included, as it has for private 

foundations. In addition, so that IRS can modify the Form 990 to require 

TINs of loan recipients from supporting organizations, Congress should 

also consider providing IRS authority to protect that information from 

public disclosure. 

Matters for 

Congressional 

Consideration 

Page 36 GAO-06-799 Tax Compliance
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 donoradvised 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. 

The Commissioner of Internal Revenue provided written comments on a 

draft of this report in a July 19, 2006, letter, which is reprinted in appendix

V. IRS said our recommendations would help it deter abuse within taxexempt and government entities and the misuse of such entities by third 

parties. IRS agreed with our two recommendations regarding requiring 

more comprehensive reporting of donor-advised fund activity and 

requiring supporting organizations to report their supported organizations’ 

EINs on the Form 990. IRS said it will consider these form changes as part 

of the Form 990 revision process, but the timing of these revisions will 

depend on available resources. IRS also said that reporting supported 

organizations’ EINs would potentially help with early identification of 

abuses involving promoters and donors getting back their donations in the 

form of a purported loan that may never be repaid. Regarding our third 

recommendation, which had been to require that the TINs for large-loan

recipients be reported on the Form 990, IRS agreed that greater 

transparency and better tracking of loans are needed. However, IRS did 

not believe that it had the authority under current law to protect the TINs 

of loan recipients from public disclosure if the TINs were reported on the 

Form 990. As a result, we have added a matter for congressional 

consideration to provide IRS the authority to protect loan recipient TINs 

on the Form 990 from public disclosure and revised the recommendation 

so that if provided the authority to protect the information from public 

disclosure, IRS should revise the Form 990 to collect loan recipient TINs. 

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from its 

issue date. At that time, we will send copies to the Ranking Minority 

Member, the Senate Committee on Finance; the Secretary of the Treasury;

the Commissioner of Internal Revenue; and other interested parties. We 

will make copies available to others on request. In addition, the report will 

be available at no charge on the GAO Web site at http://www.gao.gov. 

Recommendations for 

Executive Action 

Agency Comments 

Page 37 GAO-06-799 Tax Compliance
If you or your staff have any questions about this report, please contact me 

at (202) 512-9110 or brostekm@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. Key contributors to this report are listed in appendix VI. 

Sincerely yours, 

Michael Brostek 

Director, Tax Issues 

Strategic Issues 

Page 38 GAO-06-799 Tax Compliance
Appendix I: Tax-Exempt Excise Taxes 

Page 39 GAO-06-799 

 Appendix I: Tax-Exempt Excise Taxes 

Over the years, Congress has imposed various excise taxes that affect taxexempt entities, particularly private foundations under section 501(c)(3). 

Public charities differ in several ways from private foundations. Public 

charities have broad public support and tend to provide charitable 

services directly to beneficiaries. Private foundations are often tightly 

controlled and receive a significant portion of their funds from a small 

number of donors, and tend to make grants directly to other organizations

rather than directly provide charitable services. Since these differences 

create the potential for self-dealing or abuse by a small group, private 

foundations are subject to anti-abuse rules not applicable to public 

charities. In addition, both public charities and private foundations are 

generally prohibited from engaging in certain types of transactions. Excise 

taxes are to be levied on public charities and private foundations, as well 

as a few other types of tax-exempt entities, that violate the rules. Details 

on these rules and excise taxes follow. 

Section 4955 was added by the Revenue Act of 1987, P.L. 100-203. 

According to the House Report1

 for the Act, the committee believed that 

the excise tax applicable to private foundations for making prohibited 

political expenditures (section 4945) should also apply to public charities.

Section 4955 imposes an initial 10 percent excise tax on each political 

expenditure of a section 501(c) (3) organization. An additional 2-1⁄2 percent 

excise tax is imposed on the organization’s manager if the manager knew 

that it was a political expenditure. Political expenditures include any 

amounts paid or incurred by the organization in any participation or 

intervention in any political campaign on behalf of any candidate for 

public office. If an initial tax has been imposed regarding a political 

expenditure and that expenditure is not corrected, an additional tax equal 

to 100 percent of the amount is to be imposed on the organization. An 

additional tax equal to 50 percent of the amount of the expenditure is to be 

imposed on the organization’s manager if that manager refuses to agree to

part or all of the correction. 

Section 4958 was added in 1996 by the Taxpayer Bill of Rights 2, P.L. 104-

168. According to the related House Report2

 this excise tax was added to 

ensure that the advantages of tax-exempt status benefit the community 

and not private individuals. The act provided for this intermediate sanction 

(i.e., something short of a loss of tax-exemption) to be imposed when 

Excise Tax on Section 

501(c)(3) Political 

Expenditures (Section 

4955) 

Excise Tax on Section 

501(c)(3) and (4) Excess 

Benefit Transactions 

(Section 4958) 

 1

H. Rep. No. 100-391 (1987). 

2

H. Rep. No. 104-506 (1996). 

Tax Compliance
Appendix I: Tax-Exempt Excise Taxes 

nonprofit organizations engage in transactions with certain insiders that 

result in private inurement. Section 4958 imposes an initial tax of 25 

percent on each excess benefit transaction entered into between a 

disqualified person and tax-exempt organizations under sections 501(c)(3) 

and (4). The initial tax is to be paid by this disqualified person, including 

any person who at any time during the 5-year period ending on the date of 

the transaction was in a position to exercise substantial influence over the 

organization, a member of this person’s family, and a 35 percent controlled 

entity. Such an entity exists when a disqualified person owns more than 35 

percent of the voting power of a corporation, more than 35 percent of the 

profit interest of a partnership, or more than 35 percent of the beneficial 

interest of a trust or estate. If an initial tax is imposed on the disqualified 

persons, an additional tax of 10 percent is to be imposed on the 

organization’s manager if that manager participated knowing that it was an 

excess benefit transaction. If the excess benefit transaction is not 

corrected within the taxable period, a tax equal to 200 percent of the 

excess benefit transaction will be imposed on the disqualified person. 

Private foundations are not subject to this excise tax. 

Section 4940 was added by the Tax Reform Act of 1969, P.L. 91-172. The 

related Senate Report3

 described the excise tax as an “audit fee tax” that

was believed to be necessary to cover IRS’s costs for increased 

supervision over private foundations under the act. Section 4940 imposes a 

2 percent excise tax on the net investment income of tax-exempt private 

foundations. Net investment income includes income from interest, 

dividends, and net capital gains that is reduced by the expenses incurred 

to earn it. This tax is 1 percent if a private foundation meets certain 

distribution requirements. Private foundations that meet the requirements 

to be an “exempt operating foundation” are not subject to this excise tax.

Among these requirements are stipulations that the foundation be publicly

supported for at least 10 years and that it have a governing body that is 

broadly representative of the general public. Private foundations that are 

not exempt from taxation are subject to this excise tax and unrelated 

business income tax. 

Because a tax-exempt entity cannot operate to confer a benefit on private 

parties, Section 4941 was enacted by the Tax Reform Act of 1969. 

According to the Senate Report, generally prohibiting self-dealing 

transactions would minimize the need to apply the subjective arm’s-length 

Excise Tax on Private 

Foundation Investment 

Income (Section 4940) 

Excise Tax on Private 

Foundation Acts of SelfDealing (Section 4941) 

 3

S. Rep. No. 91-552 (1969). 

Page 40 GAO-06-799 Tax Compliance
Appendix I: Tax-Exempt Excise Taxes 

standard that was used for loans, payments of compensation, and 

preferential availability of services under the 1950 amendments. Section 

4941 imposes a 5 percent excise tax on acts of self-dealing between a 

private foundation and disqualified persons. This tax is to be paid by the 

disqualified person who participated in the self-dealing. An additional tax 

equal to 200 percent of the amount involved is to be imposed if the selfdealing is not corrected during the taxation period. A separate tax equal to

2-1⁄2 percent of the amount involved is to be imposed on the foundation’s 

manager if that manager knowingly participated in the act of self-dealing.

If this additional tax has been imposed on the foundation manager and

that manager refuses to agree to part or all of the correction, an additional 

tax equal to 50 percent of the amount is to be imposed. Acts of self-dealing 

include sales, exchanges, or leases of property; lending of money or other

extensions of credit; and payment of compensation. Disqualified persons 

include substantial contributors to the foundation, foundation managers, 

an owner of more than 20 percent of a business enterprise that is a 

substantial contributor, and certain government officials. 

Section 4942 was enacted by the Tax Reform Act of 1969. Prior to it, a 

private foundation could lose its exemption if it failed to make

distributions towards its charitable purposes instead of just accumulating

income. According to the Senate Report, the committee believed that loss 

of exempt status as the only sanction was often ineffective or harsh, and 

that substantial improvement could be achieved by providing a graduation

of sanctions if income is not distributed. Section 4942 imposes a 15 

percent excise tax on the undistributed income of a private foundation for 

any taxable year in which the required amount has not been distributed 

before the first day of the next taxable year. If an initial tax has been 

imposed under section 4942 and the income remains undistributed at the 

end of the taxable period, a tax equal to 100 percent of the remaining 

undistributed amount is to be imposed. This excise tax does not apply to 

private operating foundations that meet distribution requirements or to the 

extent that the failure to distribute is due solely to an incorrect valuation

of assets as long as other requirements are met. 

Section 4943 was enacted by the Tax Reform Act of 1969. According to its 

Senate Report, the use of foundations to maintain control of a business 

appeared to be increasing, and some who wished to use a foundation’s 

stock holdings to control a business were relatively unconcerned about 

producing income for charitable purposes. Where the charitable 

ownership predominated, the business could unfairly compete with 

businesses whose owners were required to pay taxes on their business 

income. The committee concluded that a limit on the extent to which a 

Excise Tax on Private 

Foundation Failure to 

Distribute Income (Section 

4942) 

Excise Tax on Private 

Foundation Excess 

Business Holdings 

(Section 4943) 

Page 41 GAO-06-799 Tax Compliance
Appendix I: Tax-Exempt Excise Taxes 

private foundation may control a business was needed. Section 4943 

imposes a 5 percent excise tax on certain excess business holdings of a 

private foundation. Permitted holdings generally include up to 20 percent 

of the voting stock of an incorporated business enterprise (reduced by the 

percentage of the voting stock owned by all disqualified persons) and 

similar holdings in partnerships and other unincorporated enterprises 

(except sole proprietorships). If the excise tax has been imposed, 

foundations that fail to make the required divestiture of excess holdings 

above the permitted amounts are subject to an additional tax equal to 200

percent of the excess holdings. In certain cases, foundations are allowed a 

5-year period to dispose of the excess holdings and may receive an 

additional 5-year extension. 

Section 4944 was enacted by the Tax Reform Act of 1969. Under prior law, 

a private foundation could lose its exemption if it invested in a manner 

that jeopardized its exempt purpose. In the Senate Report, the committee 

concluded that limited sanctions were preferable to the loss of exemption. 

Section 4944 imposes an initial 5 percent excise tax on the amount 

involved if a private foundation invests in a manner that jeopardizes its 

exempt purpose (e.g., investing with the purpose of income production or 

property appreciation). If this tax is imposed on the foundation, a separate 

5 percent excise tax is to be imposed on the foundation manager if that 

manager knew that making the investment would jeopardize the 

foundation’s exempt purpose. If an initial tax is imposed, an additional tax 

equal to 25 percent of the amount of the investment is to be imposed on 

the foundation if the investment is not withdrawn within the taxable 

period. An additional tax equal to 5 percent of the amount of the 

investment is to be imposed on the foundation manager if the investment 

is not withdrawn. 

Section 4945 was enacted by the Tax Reform Act of 1969. Under prior law, 

the only sanction against prohibited political activity by a foundation was 

loss of exemption. The Senate Committee Report noted that the standards 

for determining the permissible level of political activity were so vague as 

to encourage subjective application of the sanction. As a result, section 

4945 was added to clarify the types of impermissible activities and provide

more limited sanctions. Section 4945 imposes an initial 10 percent excise 

tax on each taxable expenditure made by the foundation. An additional 2-

1⁄2 percent excise tax is to be imposed on the foundation manager if that

manager knowingly participated in the taxable expenditure. Taxable 

expenditures include amounts paid to carry on propaganda or otherwise 

influence legislation or the outcome of a public election, or to directly or

indirectly carry on a voter registration drive. If the expenditure is not 

Excise Tax on Private 

Foundation Investments 

Which Jeopardize 

Charitable Purpose 

(Section 4944) 

Excise Tax on Private 

Foundation Taxable 

Expenditures (Section 

4945) 

Page 42 GAO-06-799 Tax Compliance
Appendix I: Tax-Exempt Excise Taxes 

corrected within the taxable period, an additional tax equal to 100 percent 

of the amount of the expenditure is to be imposed on the foundation and 

an additional tax equal to 50 percent of the amount of the expenditure is to

be imposed on the foundation manager. 

Page 43 GAO-06-799 Tax Compliance
Appendix II: Summary Data Tables for 

Section 501(c)(3) Tax-Exempt Charities in Appendix II: Summary Data T 2005 Constant Dollars, Tax Years 1999-2003 ables for 

Section 501(c)(3) Tax-Exempt Charities in 

2005 Constant Dollars, Tax Years 1999-2003 

The following tables summarize data reported on the annual Forms 990 

and 990-PF filed by tax-exempt charitable entities under section 501(c)(3)

of the Internal Revenue Code. The tables cover number of returns filed 

and the reported totals for the following characteristics: assets, revenues, 

expenses, contributions received, noncash contributions received, grants 

paid, and executive compensation. The data are categorized by supporting 

organizations, private foundations, and all other 501(c)(3) charities. 

Table 4: Number of Returns Filed, Tax Years 1999 through 2003 

Tax year 

Supporting 

organizations

Percentage

change

Private 

foundations

Percentage

change

All other 501(c)(3) taxexempt charitiesPercentage

change

1999 20,217 N/A 69,812 N/A 280,033 N/A

2000 20,817 3% 74,056 6% 283,826 1%

2001 21,466 3% 77,229 4% 301,043 6%

2002 21,057 -2% 80,631 4% 289,381 -4%

2003 21,372 1% 80,365 0% 298,897 3%

Source: GAO analysis of data from IRS’s Returns Inventory and Classification System, 1999 through 2003. 

Table 5: Total Assets Reported by Section 501(c)(3) Organizations in Constant 2005 Dollars, Tax Years 1999 through 2003 

(Dollars in billions) 

Tax year 

Supporting 

organizations

Percentage

change

Private 

foundations

Percentage

change

All other 

501(c)(3) taxexempt 

charities 

Percentage

change

1999 $211.1 N/A $428.4 N/A $1,514.1 N/A

2000 213.5 1% 470.5 10% 1,544.1 2%

2001 214.6 1% 451.9 -4% 1,583.1 3%

2002 215.8 1% 447.8 -1% 1,546.7 -2%

2003 $239.4 11% $449.5 0% $1,646.3 6%

Source: GAO analysis of data from IRS’s Returns Inventory and Classification System, 1999 through 2003. 

Page 44 GAO-06-799 Tax Compliance
Appendix II: Summary Data Tables for 

Section 501(c)(3) Tax-Exempt Charities in

2005 Constant Dollars, Tax Years 1999-2003 

Table 6: Total Revenue Reported by Section 501(c)(3) Organizations in Constant 2005 Dollars, Tax Years 1999 through 2003 

 (Dollars in billions) 

Tax year 

Supporting 

organizations

Percentage

change

Private 

foundations

Percentage

change

All other 

501(c)(3) taxexempt 

charities 

Percentage

change

1999 $63.0 N/A $84.6 N/A $896.4 N/A

2000 62.5 -1% 84.4 0% 915.8 2%

2001 55.2 -12% 50.0 -41% 934.0 2%

2002 55.4 0% 35.6 -29% 925.6 -1%

2003 $65.0 17% $53.6 51% $987.4 7%

Source: GAO analysis of data from IRS’s Returns Inventory and Classification System, 1999 through 2003. 

Table 7: Total Expenses Reported by Section 501(c)(3) Organizations in Constant 2005 Dollars, Tax Years 1999 through 2003 

 (Dollars in billions) 

Tax year 

Supporting 

organizations

Percentage

change

Private 

foundations

Percentage

change

All other 

501(c)(3) taxexempt 

charities 

Percentage

change

1999 $50.0 N/A $40.6 N/A $806.5 N/A

2000 53.3 6% 44.0 8% 845.2 5%

2001 51.3 -4% 43.5 -1% 894.6 6%

2002 52.9 3% 41.6 -4% 903.3 1%

2003 $55.6 5% $41.1 -1% $927.5 3%

Source: GAO analysis of data from IRS’s Returns Inventory and Classification System, 1999 through 2003. 

Page 45 GAO-06-799 Tax Compliance
Appendix II: Summary Data Tables for 

Section 501(c)(3) Tax-Exempt Charities in

2005 Constant Dollars, Tax Years 1999-2003 

Table 8: Total Contributions Received Reported by Section 501(c)(3) Organizations in Constant 2005 Dollars, Tax Years 1999

through 2003 

 (Dollars in billions) 

Tax year 

Supporting 

organizations

Percentage

change

Private 

foundations

Percentage

change

All other 

501(c)(3) taxexempt 

charities 

Percentage

change

1999 $14.2 N/A $31.3 N/A $195.9 N/A

2000 16.3 14% 36.0 15% 211.8 8%

2001 14.7 -10% 31.3 -13% 225.0 6%

2002 13.3 -9% 25.2 -19% 211.9 -6%

2003 $15.5 17% $27.7 10% $219.4 4%

Source: GAO analysis of data from IRS’s Returns Inventory and Classification System, 1999 through 2003. 

Table 9: Total Noncash Contributions Received Reported by Section 501(c)(3) Organizations in Constant 2005 Dollars, Tax 

Years 1999 through 2003 

 (Dollars in billions) 

Tax year 

Supporting 

organizations

Percentage

change

Private 

foundationsa

Percentage

change

All other 

501(c)(3) taxexempt 

charities 

Percentage

change

1999 $2.7 N/A N/A N/A $16.7 N/A

2000 2.6 -1% N/A N/A 20.3 22%

2001 2.6 -2% N/A N/A 21.0 3%

2002 1.8 -30% N/A N/A 18.0 -14%

2003 $2.4 33% N/A N/A $25.8 43%

Source: GAO analysis of data from GuideStar, 1999 through 2003. 

a

Unlike organizations that file a Form 990, private foundations do not report the amount of noncash

contributions received on the Form 990-PF. 

Page 46 GAO-06-799 Tax Compliance
Appendix II: Summary Data Tables for 

Section 501(c)(3) Tax-Exempt Charities in

2005 Constant Dollars, Tax Years 1999-2003 

Table 10: Total Grants Paid Reported by Section 501(c)(3) Organizations in Constant 2005 Dollars, Tax Years 1999 through 

2003 

 (Dollars in billions) 

Tax year 

Supporting 

organizations

Percentage

change

Private 

foundations

Percentage

change

All other 

501(c)(3) taxexempt 

charities 

Percentage

change

1999 $ 8.5 N/A $32.4 N/A $42.6 N/A

2000 11.3 33% 34.9 8% 45.5 7%

2001 8.0 -29% 35.9 3% 48.2 6%

2002 7.9 -2% 33.9 -6% 47.4 -2%

2003 $10.7 37% $31.0 -9% $58.2 23%

Source: GAO analysis of data from IRS’s Returns Inventory and Classification System for private foundations, and from GuideStar for

supporting organizations and all other 501(c)(3) tax-exempt charities, 1999 through 2003.

Table 11: Total Executive Compensation Reported by Section 501(c)(3) Organizations in Constant 2005 Dollars, Tax Years 

1999 through 2003

 (Dollars in billions) 

Tax year 

Supporting 

organizations

Percentage

change

Private 

foundations

Percentage

change

All other 

501(c)(3) taxexempt 

charities 

Percentage

change

1999 $0.9 N/A $0.7 N/A $11.1 N/A

2000 1.0 6% 0.8 8% 11.5 3%

2001 1.0 4% 0.9 9% 12.9 12%

2002 1.0 2% 0.8 -3% 12.8 -1%

2003 $1.1 7% $0.8 -4% $13.0 2%

Source: GAO analysis of data from IRS’s Returns Inventory and Classification System, 1999 through 2003. 

Page 47 GAO-06-799 Tax Compliance
Appendix III: Noncash Contribution Valuation Appendix III: Noncash Contribution Methods 

Valuation Methods 

IRS’s Publication 561 provides guidance to taxpayers on determining the 

value of property donated to qualified organizations. It defines “fair market 

value” (FMV) as the price a willing, knowledgeable buyer would pay a 

willing, knowledgeable seller when neither has to buy or sell. Future 

events that may affect the property cannot be included in FMV unless they 

are known at the time of the donation. In addition, past events, such as 

rapid growth of value over the short term, may have to be balanced out

over a longer time frame for a realistic projection of value. While there is 

no single method to determine FMV, factors to consider include the cost 

or selling price, sales of comparable properties, replacement costs, and 

opinions of experts. 

Although there are many categories of noncash contributions including 

vehicles, used clothing, and works of art that charities may receive, donoradvised funds and supporting organizations typically receive larger 

noncash gifts, according to IRS. 

For stocks and bonds, the fair market value is the average price between 

the highest and lowest trading price on the date of donation. This method 

is only to be used for items for which an active market exists. If the item is 

traded on multiple exchanges, then the principle exchange must be used. 

In addition, large blocks of stock may require an expert to assist in the 

appraisal. 

For closely-held securities, determining FMV would include considering 

the company’s net worth, prospective earning power, dividend-paying

capacity, and other factors such as the economic outlook in the particular 

industry and the company’s relative position within it, and the value of 

securities of companies engaged in the same or similar business. 

For real estate, a detailed appraisal by a qualified appraiser is required. 

Certain items must be included such as complete description, legal 

description, lot and block number, physical features, condition, dimension, 

zoning, and potential uses. Three valuation methods may be used—

comparable sales, capitalization of income, and replacement cost new or 

reproduction cost minus observed depreciation (this method used alone 

does not determine FMV but rather tends to set the upper limit of value). 

IRC section 170, particularly Sec 170(f)(8), provides the basis for reporting 

noncash charitable contributions, such as using a qualified appraiser. The 

Page 48 GAO-06-799 Tax Compliance
Appendix III: Noncash Contribution Valuation 

Methods 

American Jobs Creation Act of 20041 also contains provisions regarding 

noncash contributions, including requiring the donor to attach a qualified

appraisal to the tax return if the contribution is over $500,000.

Taxpayers are required to file IRS Form 8283 (Noncash Charitable 

Contributions) if the charitable tax deduction claimed is greater than $500. 

Form 8283 should be filed for the tax year that the deduction is claimed. 

Different sections of the form are to be completed based on type of 

property donated and whether the amount claimed is less than or greater 

than $5,000. Generally appraisals are required by a qualified appraiser for 

donations of more than $5,000. Charitable organizations receiving donated 

property must file Form 8282 to report information to IRS about 

disposition of certain charitable deduction property made within 2 years 

after the donor contributed the property. 

According to an IRS manager, closely-held stock is a growing concern and

challenge to IRS, since it can involve a broad base of taxpayers. He added 

that artwork, while well-publicized in terms of valuation issues, is less of a 

concern since the dollar amounts involved are small compared to other 

types of noncash contributions. In addition, the IRS manager identified the 

following challenges to addressing noncompliance, gathered from about 

100 examination cases: 

• donors are sometimes vague when describing the contribution on Form 

8283, impeding IRS’s understanding and ability to address any 

problems; 

• donors can submit Form 8283 upon examination, creating problems 

with detecting problems early; 

• corporate donors of patents can structure the contribution (e.g., pay 

maintenance fees on the patent) so that the donee is not required to file 

a Form 8282 upon disposition of the contribution; 

• no requirement exists that noncash contribution amounts reported on a 

donor’s tax return and a charity’s Form 990 must match; 

• donors take improper deductions without adverse impact to the 

charity; and

• multiple appraisals of contribution value are not helpful because 

appraisals are very subjective.

 1

 Pub. L. No. 108-357 (2004). 

Page 49 GAO-06-799 Tax Compliance
Appendix III: Noncash Contribution Valuation 

Methods 

To address some of these concerns, IRS has several initiatives looking at 

specific types of noncash contributions, such as vehicle donations and art 

valuations. Additionally, IRS has a program that compares valuations of 

noncash contributions claimed by taxpayers (on Form 8283) with the price 

obtained by recipient charities when they resell the property. IRS has used 

data from this program to complete a study of large noncash 

contributions. 

Page 50 GAO-06-799 Tax Compliance
Appendix IV: Methods and Materials Used to 

Market Donor-Advised Funds and Supporting 

Organizations to Potential Donors 

Earlier in this report, we discussed some of the methods and materials 

used to publicize donor-advised funds and supporting organizations that 

may lead to noncompliance with tax laws. The following is a discussion of 

donor motivations and materials and methods that are not intended to lead 

to abusive schemes. To obtain this information, we spoke with 11 

community foundation managers, 6 financial professionals, and 18 

managers at IRS. The examples we discuss come from materials that we 

were referred to or located online based on our interviews, and do not 

necessarily represent all materials and methods used to market donoradvised funds and supporting organizations. 

Because donor-advised funds and supporting organizations are just two 

among many charitable giving options, potential donors must select an 

option that best suits their goals and donation plan. Factors that may 

influence a donor’s decision include: types of causes they wish to support, 

the size and type of donation they wish to give, and their desired 

involvement level in directing the use of their donation. For example, 

some donors, who desire to donate to a specific community or to have indepth information on charities receiving their funds, might find that a 

donor-advised fund administered by a community foundation is an 

appealing option. Community foundations, which typically have a local 

focus, may do particularly well at performing due diligence on charities 

receiving their funds, according to one estate planner. Due diligence may 

include identifying organizations listed in IRS Publication 78,1

 or 

interacting with exempt organizations that are potential recipients of 

funds, according to community foundation managers. 

To evaluate giving options in relation to their goals, donors may seek 

information from accountants, financial planners, lawyers, community 

foundations, the Internet, and tax-exempt organizations, among others. 

Some exempt organizations’ efforts to market donation options tend to be

limited, according to a study by a nonprofit philanthropic research and

development organization. This makes personal and business relationships 

important ways for donors to learn about donor-advised funds and 

supporting organizations, according to community foundation managers. 

Because many donor-advised funds are administered by community 

foundations or are housed in charities affiliated with commercial 

 1

IRS’s Publication 78, the Cumulative List of Organizations described in Section 170(c)

of the Internal Revenue Code of 1986, contains a list of all organizations eligible to accept 

tax-deductible donations.

Page 51 GAO-06-799 Tax Compliance
investment firms, such as Vanguard and Fidelity, these relationships may 

be particularly important sources for introducing donors to donor-advised 

funds, according to a community foundation manager interviewed by The

Chronicle of Philanthropy. According to several community foundation 

managers, many donors to community foundation donor advised funds are 

referred from professional advisers. Recognizing the importance of these 

relationships, some community foundations have launched specific 

outreach efforts aimed at financial advisers and other professionals who 

could refer donor-advised fund clients. 

In addition to discussions with professionals, donors may encounter or be

presented with a variety of material explaining charitable giving options. 

Material may contain details of giving options in relation to both tax 

incentives to the donor and charitable benefits for the exempt 

organization. Some firms advertise services for clients in magazines or 

national publications, according to IRS managers and an estate lawyer, 

while others depend on the Internet. Descriptions of professional services 

can include outlines of charitable giving options, some of which attempt to

explain giving options based on the legal, practical, and charitable 

characteristics of each option. For example, some community 

foundations, philanthropy organizations, and investment firms provide 

tables or descriptions comparing various combinations of donor-advised 

funds, supporting organizations, private foundations, and other donation

options. These tables describe and compare levels of donor involvement, 

tax status, deductions by asset type, start-up costs, and administrative 

requirements. Other material outlines the steps and requirements 

necessary to establish a donor-advised fund or supporting organization. 

Page 52 GAO-06-799 Tax Compliance
Appendix V: Comment from Department of Appendix V Treasury : Comments from the Internal 

Revenue Service 

Page 53 GAO-06-799 Tax Compliance
Appendix V: Comment from Department of 

Treasury 

Page 54 GAO-06-799 Tax Compliance
Appendix V: Comment from Department of 

Treasury 

Page 55 GAO-06-799 Tax Compliance
Appendix V: Comment from Department of 

Treasury 

Page 56 GAO-06-799 Tax Compliance
Appendix VI: GAO Contact and Staff 

Acknowledgments 

GAO Contact Michael Brostek, (202) 512-9110 

In addition to the contact named above, Tom Short, Assistant Director; 

Mark Bondo; Marta Chaffee; Elizabeth Fan; Evan Gilman; Nancy Hess; 

Shirley Jones; Donna Miller; John Mingus; Coltrane Stansbury; Paul 

Thacker; and Lindsay Welter made key contributions to this report. 

Acknowledgments 

Page 57 GAO-06-799 Tax Compliance
Glossary 

Charity insider An individual such as an officer, board member, or other persons able to 

exercise substantial influence over a tax-exempt organization. Donors to 

donor-advised funds are rarely considered to be insiders, while donors to 

supporting organizations can sometimes be insiders if they also serve on 

the supported organization’s board. 

An organization, usually a nonoperating charity, providing charitable 

support through grants to local or regional communities. Typically a 

community foundation will aggregate contributions from local residents, 

build endowments, and distribute grants to communities. 

An individual, defined in IRC section 4946, who may have a significant 

conflict of interest with a charity due to financial, executive, or voting 

powers, such as those held by donors, officers, or directors. The definition 

applies to individuals involved with private foundations and supporting 

organizations, and has a limited application to public charities that are not 

supporting organizations. 

Charitable giving accounts that are held by a public charity. A donor 

contributes to an individual account within a charity’s donor-advised fund, 

and maintains an advisory role on distribution of the funds. No statutory 

or regulatory definition currently exists. 

Authority exerted by a donor that exceeds what is allowable for a donoradvised fund or supporting organization. Donor control includes direct or 

indirect power over decisions regarding an organization’s assets or 

operations. 

A transaction, directly or indirectly, between a disqualified person and a 

tax-exempt organization that results in economic benefit to the 

disqualified person exceeding the value of service to the organization. 

Subject to excise taxation under IRC section 4958. 

A tax imposed on an act, occupation, privilege, manufacture, sale, or 

consumption and that is usually designed to influence taxpayer behavior.

Community foundation

Disqualified person

Donor-advised fund

Donor control 

Excess benefit 

Excise tax 

Page 58 GAO-06-799 Tax Compliance
A set of procedures used by private foundations to ensure responsible use 

of grants to charities. The assessment may include: 

a pre-grant inquiry on the recipient charity, establishment of commitments 

for grant recipient, investment requirements, or agreements on actions if 

agreements are violated.

Excise taxes that provide a corrective remedy for excess benefit 

transactions. The excise taxes are paid by the disqualified person, as 

defined in IRC 4958, who receives excess benefit, or by a charity manager 

who knowingly participates in the transaction. 

The transfer or use of a charity’s assets or income for the benefit of a 

charity’s insiders. Inurement is a specific form of private benefit, and is 

prohibited for all 501(c)(3) organizations. 

Application for Recognition of Exemption under IRC Section 501(c)(3) 

that organizations must file in order to receive tax-exempt status. 

IRS information return that public charities are required to file annually 

unless the organization is a church or entity associated with a church, a 

certain type of governmental unit affiliate, or falls below certain gross 

receipts thresholds. 

IRS information return that private foundations must file annually. 

An asset other than cash donated to a tax-exempt organization, for 

example, stocks, bonds, vehicles, artwork, or real estate. 

An organization’s expenditures to individuals or charities for certain 

operational or administrative functions. Private foundations must 

distribute about 5 percent of the average market value of their 

noncharitable use assets, generally stocks or other investments that 

compose the foundation’s endowment; donor-advised funds and 

supporting organizations do not have to meet a minimum payout. 

Expenditure responsibility 

process 

Intermediate sanctions

Inurement 

IRS Form 1023 

IRS Form 990

IRS Form 990-PF 

Noncash contribution

Payout

Page 59 GAO-06-799 Tax Compliance
Private foundation A 501(c)(3) organization, further defined in IRC section 509(a), that does 

not qualify as a public charity. Generally, private foundation rules and 

regulations are more complex and limiting than those for public charities.

The transfer or use of a charity’s assets or income, or the conferment of 

undue advantage, to private persons who are not necessarily charity 

insiders. Some private benefit is permitted, but it must not be more than 

incidental to the charitable purpose being served. Private benefit is a 

broad term that includes inurement and applies to all 501(c)(3) 

organizations. 

A tax-exempt organization defined in IRC section 501(c)(3) that receives 

broad financial support or is a supporting organization. Public charities 

have fewer legal requirements than private foundations. 

A corrective action that removes a charity’s tax-exempt charter. 

Revocation is used for violations such as inurement, performing 

nonexempt activities, operating in a commercial manner, and operating for 

private use.

A tax-exempt organization operated for a charitable purpose. Purposes 

considered to be charitable include serving the poor and distressed; 

advancing religious, educational, or scientific endeavors; and protecting 

human or civil rights. All 501(c)(3) organizations are considered either 

public charities or private charities, known as private foundations. 

Contributions to charities are tax deductible under IRC section 170. 

Transactions, either direct or indirect, made between a private foundation

and disqualified person that involve (1) sale, exchange, or lease of 

property; (2) lending of money or other extensions of credit; 

(3) providing goods, services, or facilities; (4) paying compensation to or 

reimbursing expenses of a disqualified person; (5) transferring foundation

income or assets to, or for the use or benefit of, a disqualified person; and 

(6) certain agreements to make payments of money or property to 

government officials. 

Private benefit

Public charity

Revocation

Section 501(c)(3) 

organization 

Self-dealing

Page 60 GAO-06-799 Tax Compliance
A tax-exempt organization that receives funds or services from a 

supporting organization.

A public charity defined under IRC section 509(a)(3) that provides money 

or services to one or more supported organizations. There are three types 

of supporting organizations defined by their relationship with their 

supported organization(s): 

operated, supervised, or controlled by a supported organization (parent–

subsidiary relationship); 

supervised or controlled in connection with the supporting organization 

(brother-sister relationship); and 

operated in connection with the supported organization(s). 

Page 61 GAO-06-799 Tax Compliance

Supported organization

Supporting organization 

Type I 

Type II 

Type III 

(450432) 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

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