Accordingly, the donor ultimately can give more money to public charities through the use of a private foundation. A private foundation must apply for recognition of, and be recognized as, tax-exempt by the Internal Revenue Service. To be recognized as exempt, the foundation's sole purpose must be to make contributions to publicly supported charities and it must be operated solely in accord with that purpose. To apply, a form is filed with the Internal Revenue Service enclosing the organizational documents of the foundation and detailing its operations, including its current and proposed budgets. After reviewing the application, if the foundation meets the standards set by the Internal Revenue Service, the IRS will send a letter to the foundation recognizing it as tax-exempt.
Private foundations are subject to certain restrictions upon their operation.
Violation of these restrictions can result in the imposition of substantial penalty taxes and the loss of tax-exempt status. These restrictions are meant to ensure that the foundation operates to help publicly-supported charities. Most private foundations should not have difficulty avoiding the imposition of the penalty taxes. A foundation must generally distribute to publicly supported charities an amount equal to five percent of the fair market value of its assets to avoid the tax on failure to meet minimum distributions. A private foundation is required to file an annual tax return with the Internal Revenue Service on a Form 990.