What are the IRS red flags for family foundations?

What are the IRS red flags for family foundations?

On Behalf of | Apr 13, 2023 | Charitable Giving

A New York family foundation is generally a non-profit organization funded by donors to support public or private charities. These endowments are tax-deductible. Because these organizations may primarily consist of related family members, the IRS carefully audits the foundation’s tax returns, the foundation’s members, and their associates to ensure that they don’t use the donated funds for personal enrichment. Here are some of the agency’s stipulations.

Five% rule

Charitable giving is commendable and benefits the donor as well as the recipient. In order to avoid paying taxes, the foundation must allocate at least five% of its total assets annually for operating expenses and contributions to one or more charities.

Disqualified persons

The IRS looks very carefully for instances of personal gain among disqualified members of a family foundation. A disqualified member is a significant donor, manager, officer or family member. Here are some of the IRS tax auditor’s red flags regarding disqualified members:

  • Selling or leasing foundation property at steep discounts
  • Deducting travel expenses for accompanying non-management family members
  • Receiving a personal loan from the foundation
  • Hiring for “dummy” positions
  • Earning excessive salaries

Inappropriate donations

A family foundation can make charitable donations and grants but may not contribute to political or lobbying groups. Self-interest activities will catch the eye of an auditor.

Tax penalties

Whether you intentionally or accidentally demonstrated monetary favoritism toward a disqualified person does not matter to the IRS. Following a tax audit, the IRS might order you to undo the transaction and pay an excise tax of 10% to 200% of the transaction’s value. The IRS can remove the foundation’s tax-exempt status if the offense is continuous and severe.

Seek professional advice whenever you have questions about your family foundation’s management or allowable deductions.