IRS Publication 5590 – In the complex world of tax-exempt organizations, private foundations must navigate strict regulations to maintain their status and avoid penalties. IRS Publication 5590, specifically the Exempt Organizations Technical Guide TG 62, focuses on excise taxes related to taxable expenditures under Internal Revenue Code (IRC) Section 4945. This guide is essential for foundation managers, tax professionals, and nonprofit leaders aiming to comply with Chapter 42 rules. Released in its latest revision on August 6, 2024, it provides detailed insights into prohibited activities, tax calculations, and correction processes. Whether you’re managing a private foundation or advising on exempt organizations, understanding these guidelines can prevent costly mistakes.
This article breaks down the key elements of IRS Publication 5590, explaining taxable expenditures, excise taxes, reporting requirements, and more. We’ll explore how these rules curb potential abuses while supporting charitable purposes.
What Is IRS Publication 5590 and TG 62?
IRS Publication 5590 serves as a technical guide for exempt organizations, with TG 62 specifically addressing “Excise Taxes on Taxable Expenditures – IRC Section 4945.” Issued by the Internal Revenue Service (IRS), this document is not an official legal pronouncement but offers practical guidance based on the Tax Reform Act of 1969 and subsequent amendments, such as the Pension Protection Act of 2006.
Private foundations, defined as organizations exempt under IRC Section 501(c)(3) but not qualifying as public charities under Section 509(a), are the primary focus. The guide aims to prevent abuses like influencing legislation, engaging in political activities, making improper grants, or funding noncharitable purposes. It emphasizes compliance to ensure foundations operate for religious, charitable, scientific, literary, educational, or similar exempt purposes as outlined in IRC Section 170(c)(2)(B).
Key updates include doubled first-tier tax rates from the 2006 Act and mandatory electronic filing for Form 990-PF for tax years beginning on or after July 2, 2019. As of the publication’s revision, it remains a critical resource for IRS examinations, reporting, and penalty avoidance.
Defining Taxable Expenditures Under IRC 4945
At the core of IRS Publication 5590 is the definition of a “taxable expenditure” under IRC Section 4945(d). This refers to any amount paid or incurred by a private foundation that deviates from approved charitable purposes. The guide categorizes these into five main types, ensuring foundations avoid activities that could jeopardize their tax-exempt status.
The taxable period begins on the date of the expenditure and ends with the mailing of a notice of deficiency or tax assessment. Importantly, expenditures can overlap categories, but taxes are imposed only once per infraction. Permitted expenditures include investments for income generation, taxes, unrelated business income deductions, and reasonable administrative costs tied to qualifying distributions under IRC Section 4942(g).
Types of Taxable Expenditures Explained
IRS Publication 5590 details specific prohibited activities, providing examples and exceptions to help foundations stay compliant.
Attempting to Influence Legislation (Lobbying)
Under IRC Section 4945(d)(1), expenditures for propaganda or influencing legislation are taxable. This includes both direct lobbying (communications with legislators) and grassroots lobbying (public calls to action on specific legislation). Legislation encompasses actions by Congress, state legislatures, local councils, referenda, and even tribal governments, but excludes executive or judicial matters.
Exceptions include nonpartisan analysis, studies, or research with a “full and fair exposition of facts”; technical advice requested in writing by legislative bodies; discussions of broad social issues; and self-defense communications protecting the foundation’s existence or exempt status. Grants to public charities not earmarked for lobbying are also exempt.
Influencing Public Elections and Voter Registration Drives
IRC Section 4945(d)(2) taxes expenditures aimed at influencing specific public elections, such as campaigning for or against candidates. Nonpartisan voter registration drives are allowed if conducted by qualifying Section 501(c)(3) organizations meeting an 85% public support test, operating in at least five states, and dedicating most income to such activities.
Grants to Individuals for Travel, Study, or Similar Purposes
Grants like scholarships, fellowships, prizes, or loans fall under IRC Section 4945(d)(3) and are taxable unless they meet Section 4945(g) requirements. These include objective, nondiscriminatory selection from a broad pool, advance IRS approval, and supervision through reports and verifications. Employer-related programs must align with Revenue Procedure 76-47, limiting grants to avoid employment inducements.
Grants for past achievements without future conditions are not taxable under this section.
Grants to Organizations
Per IRC Section 4945(d)(4), grants to non-public charities are taxable unless the recipient is a qualifying public charity (e.g., under Sections 509(a)(1)-(3)), an exempt operating foundation, or the foundation exercises “expenditure responsibility.” This involves pre-grant inquiries, written agreements, grantee reports, and IRS disclosures on Form 990-PF. Foreign grants require equivalency determinations.
Expenditures for Noncharitable Purposes
Any expenditure not aligning with IRC Section 170(c)(2)(B) purposes, such as political or recreational activities, is taxable under Section 4945(d)(5). Program-related investments may qualify as exceptions if they further exempt goals.
Excise Taxes Imposed on Taxable Expenditures
IRS Publication 5590 outlines a two-tier tax system to penalize violations, with rates doubled by the 2006 Pension Protection Act.
First-Tier Taxes
- On the private foundation: 20% of the taxable expenditure amount (IRC Section 4945(a)(1)).
- On foundation managers: 5% if they knowingly and willfully agree to the expenditure, capped at $10,000 per act (IRC Section 4945(a)(2)).
“Knowing” requires actual awareness, while “willful” implies voluntary action. Reasonable cause, like reliance on legal advice, may excuse liability.
Second-Tier Taxes
If uncorrected within the taxable period:
- On the foundation: 100% (IRC Section 4945(b)(1)).
- On managers: 50%, up to $20,000 per act (IRC Section 4945(b)(2)).
Repeated violations can lead to foundation termination under IRC Section 507, imposing a termination tax.
Taxes are joint and several for managers, but limited overall.
Reporting and Payment Requirements
Private foundations report taxable expenditures on Form 4720, filed electronically for returns due after July 15, 2021. Foundation managers file separately. Due dates align with Form 990-PF or individual returns. Expenditure responsibility requires detailed records, including grantee reports and IRS disclosures.
Statute of limitations is typically three years if disclosed, extending to six if not, or indefinitely for fraud.
Corrections and Abatements for Excise Taxes
Correction involves recovering funds or taking IRS-prescribed actions, such as withholding payments or obtaining reports. It must occur within the correction period (90 days post-notice, extendable) to abate second-tier taxes automatically.
First-tier taxes may be abated under IRC Section 4962 for reasonable cause, non-willful neglect, and timely correction. Advance IRS approval is available for complex cases.
Important Notes and Exceptions in IRS Publication 5590
- Qualifying public charities are exempt from expenditure responsibility.
- Program-related investments have modified rules.
- Foreign organizations can receive grants via good faith determinations.
- Earmarked grants avoid taxes if not controlled by the foundation.
- Penalties for failure to file or accuracy issues apply under Sections 6651, 6652, 6662, and more.
- Electronic filing is mandatory, with limited exceptions.
Violations may result in revocation of exempt status, turning the entity into a taxable private foundation.
Conclusion: Staying Compliant with IRC 4945
IRS Publication 5590 provides invaluable guidance for private foundations to avoid excise taxes on taxable expenditures under IRC 4945. By understanding prohibited activities, implementing strong oversight, and correcting issues promptly, organizations can focus on their charitable missions without IRS penalties. Always consult the latest IRS resources or a tax advisor for personalized advice, as rules may evolve. Download the full publication from the IRS website to dive deeper into TG 62.