E. BUDGET CONSIDERATIONS AND FUNDING RESTRICTIONS

i. Spending LITC Grant Funds and Matching Funds

Grant funds and matching funds must be used for expenses in accordance with the cost principles guidance in 2 CFR Parts 200 and 1000. Generally, for an expense to be allowable, the expense must:

n Be necessary and reasonable for the performance of the federal award and be allocable thereto under the

applicable cost principles. See 2 CFR § 200.403(a);

n Conform to any limitations or exclusions in the cost principles or in the federal award as to types or amount of

cost items. See 2 CFR § 200.403(b);

n Follow policies and procedures that apply uniformly to both federally-financed and other activities of the grant

recipient. See 2 CFR § 200.403(c);

n Be accorded consistent treatment by the grant recipient. A cost may not be assigned to a federal award as

a direct cost if any other cost incurred for the same purpose in like circumstances has been allocated to the federal award as an indirect cost. See 2 CFR § 200.403(d);

n Be determined in accordance with generally accepted accounting principles, except for state and local

governments and Indian tribes only, as otherwise provided for in the cost principles. See 2 CFR § 200.403(e);

n Not be included as a cost or used to meet cost-sharing or matching requirements of any other federally financed program in either the current or a prior period. See 2 CFR § 200.403(f);

n Be adequately documented. See 2 CFR § 200.403(g); and

n Be incurred during the approved budget period. See 2 CFR § 200.403(h).

NOTE: In general, grant funds cannot be carried forward from one year to the next unless the LITC Program Office approves such carryover. In appropriate circumstances, the LITC Program Office may use discretion to waive prior written approvals to carry forward unobligated balances to subsequent budget periods pursuant to 2 CFR § 200.308(g)(3).

Clinics should refer to the Uniform Guidance for detailed rules regarding allowable and unallowable expenses. Generally, the same rules that apply to expenditures made using federal grant funds apply to expenditures made using matching funds. However, IRC § 7526(c)(5) specifically prohibits indirect expenses, including general overhead of the institution sponsoring the clinic, from being counted as matching funds. The Department of the Treasury, of which the IRS is a bureau, adopted the provisions in 2 CFR Part 200 ⁶ with specific exceptions set forth in 2 CFR § 1000.306, which addresses the valuation rate applicable to controversy representation volunteer hours used as match, and 2 CFR § 1000.337, which clarifies that the right to access of records under 2 CFR § 200.337 does not extend to client information held by authorized LITC practitioners.

6 See 2 CFR Part 1000.23.

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BEST PRACTICE

Knowledge and understanding of the Uniform Guidance is crucial to properly manage LITC grant funds. Several independent vendors offer training on the Uniform Guidance, and it is highly recommended for QBAs new to managing federal grant funds to enroll in the training. Grant funds may be used to attend such training if the expense conforms to 2 CFR § 200.403.

Start-Up Expenses May Be Paid Using LITC Grant Funds

LITC grant funds may be used on start-up activities. An applicant may receive an LITC grant award for the new grant year even if it anticipates that it cannot begin operations at the start of the performance period. This is most often the case when hiring cannot start until the award is made. The budget must be adjusted accordingly. All grant recipients must satisfy the statutory matching funds requirement during the period covered by the grant and must meet all reporting requirements, regardless of when operations begin. Reports should provide information on the status of the start-up activities. In addition, the funding will be conditioned on the performance of required grant activities as detailed in Section I.A, LITC Grant Program Priorities, during the immediately succeeding grant year. Grant funds for the immediately succeeding grant year, however, are not guaranteed to be awarded if adequate progress is not made and established milestones not timely reached.

Examples of Allowable Expenses

Figure 3 lists examples of common LITC expenditures. The lefthand column lists items that are an allowable use of federal grant funds or matching funds, and the righthand column lists items that are not an allowable use of federal grant funds or matching funds. This is not an all-inclusive list. If clinics have questions about whether an expense is allowable, they should consult the Uniform Guidance. If they still have questions, they should contact their assigned Advocacy Analyst for guidance before incurring the expense.

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Figure 3, Allowable and Unallowable Expenses

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ii. Direct vs. Indirect Expenses

Direct expenses are the necessary and reasonable expenses that support LITC activities and the functions of the organization. The expenses should be allocated and charged as a direct cost of award funds if it is practical to separate the portion of the expense allocable to LITC activities. The determination of whether it is practical or reasonable to allocate expenses directly in proportion to use depends on several factors, including the size of the organization operating the LITC, the size and number of other functions the organization operates, and the amount of the expense.

Indirect expenses are often commonly referred to as Facilities and Administration (F&A) costs. The Uniform Guidance defines indirect costs as:

[T]hose costs incurred for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved. 2 CFR § 200.1, Definitions.

For example, an organization’s $5,000 expense supports LITC activities and two other programs the organization operates. Suppose the organization can spend an additional $100 in administrative costs to accurately allocate the $5,000 among the three programs in proportion to the benefit each receives. In that case, the allocation is reasonable, and the organization should perform the allocation and charge the portion of the $5,000 that is allocable to LITC activities as a direct cost.

7 An individual’s dues to a professional organization may be allowable if the following requirements are met: the dues are paid as a fringe benefit, payment as a fringe benefit is consistent with the employer’s written policy or contract, the payment of the cost meets the “reasonableness“ requirements outlined in 2 CFR § 200.404, and the payment of the cost meets the “allocability” requirements outlined in 2 CFR § 200.405.

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Now suppose the organization’s $5,000 expense supports LITC activities and two other programs the organization operates, but to properly allocate the $5,000 among the three programs in proportion to the benefit each receives, it would cost the organization an additional $2,000 in administrative costs. In that case, direct allocation of the cost is not cost-effective, and the organization can account for the $5,000 expense as an indirect cost. The organization then apportions the total indirect costs ( i.e., the indirect cost pool) to each of the benefiting programs using a method that is consistent, reasonable, auditable, and in accordance with generally accepted business practices.

The Uniform Guidance in 2 CFR § 200.414(b) recognizes that because of the diverse characteristics and accounting practices of nonprofit organizations, it is not possible to specify the types of costs which may be classified as indirect expenses in all situations. The purpose of the federal award is the determining factor in distinguishing direct from indirect costs rather than the nature of the goods and services expensed.

Typical indirect expenses may include:

n Salaries and wages of administrative and support staff;

n Related employee benefits;

n Facility occupancy costs ( e.g., utilities, security, maintenance);

n Office supplies; and

n Legal and auditing charges.

Once the organization has classified expenses as either direct or indirect, the organization must determine how to allocate the indirect costs among the programs they benefit so LITC funds do not subsidize the indirect costs of other programs or functions of the organization. To calculate the amount of federal funds allocable to indirect costs, the organization may use a negotiated ICRA approved by the organization’s cognizant agency. If the organization does not have a current negotiated (including provisional) rate, it may elect to charge a de minimis rate of up to 15%. See 2 CFR §§ 200.414(c), 200.414(f).

Indirect costs may not be used to satisfy matching funds obligations. See IRC § 7526(c)(5).

Negotiated Indirect Cost Rate Agreements and Cognizant Agencies

Obtaining an ICRA is a complex process that requires preparing and submitting an indirect cost rate proposal (including supporting schedules and documentation) and may take several months or even years to establish a final rate. A cognizant agency for indirect costs means the federal agency responsible for reviewing, negotiating, and approving cost allocation plans or indirect cost proposals developed under 2 CFR Part 200 on behalf of all federal agencies. See 2 CFR § 200.1. For Institutions of Higher Education (IHEs), cost negotiation cognizance is assigned to HHS or the Department of Defense (DoD) Office of Naval Research, normally depending on which of the two agencies provides more funds to the educational institution for the most recent three years. See 2 CFR Part 200 Appendix III of the Uniform Guidance, Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Institutions of Higher Education (IHEs), paragraph C,11.

For nonprofit organizations, the federal agency that awards the largest dollar value to the organization will be designated as the cognizant agency for indirect costs. The federal agency will negotiate and approve the indirect cost rates (unless different arrangements are agreed to by the federal agencies concerned) and where necessary, negotiate and approve other rates such as fringe benefit and computer charge-out rates. See 2 CFR Part 200, Appendix IV, Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Nonprofit Organizations, paragraph C,2,A. If an applicant has no other sources of federal funding and has questions about obtaining an ICRA, please contact the LITC Program Office to discuss possible options.

Organizations that apply an ICRA to determine the portion of indirect costs allocable to a federal award must carefully separate direct costs from costs classified as indirect in the ICRA, and the ICRA must set forth cost items included in the rate. Indirect costs are then calculated by applying the negotiated rate against the direct cost base. Costs accounted for as indirect costs in the ICRA may not be expensed as direct costs ( i.e., double-dipping). For example, if a clinic is part of a larger organization with an ICRA and the rental cost of the facility in which the clinic operates is included in the negotiated rate, the clinic may not include the facilities cost as a direct expense. The contractual expense category can be found on Form 13424-J, Detailed Budget Worksheet and Narrative Explanations.

Provisional Cost Rate Agreement

If a grant recipient is operating under a provisional ICRA at the commencement of the budget period (also referred to as funding period), which ordinarily commences January 1 and concludes December 31 of the same calendar year, the provisional rate will be used for billing and reporting purposes for that period. The rate when finalized will be applied to future budget periods during which the grant recipient receives funding, if any.

De Minimis Indirect Cost Rate

Under 2 CFR § 200.414(f) of the Uniform Guidance, a de minimis rate of up to 15% of Modified Total Direct Costs (MTDC) is available for organizations that never had a negotiated ICRA and those that had a negotiated rate that has expired. No documentation is required to justify the 15% de minimis indirect cost rate. However, if the clinic elects to use the de minimis rate to charge indirect costs, it must charge costs consistently across federal grants and may not double charge or inconsistently charge as both.

Modified Total Direct Cost

MTDC includes, among other things, all direct salaries and wages, applicable fringe benefits, materials and supplies, services, and travel. MTDC excludes certain items, including equipment, capital expenditures, rental costs, tuition remission, scholarships and fellowships, and participant support costs. Other items may only be excluded when necessary to avoid a serious inequity in the distribution of indirect costs, and with the approval of the cognizant agency for indirect costs. See 2 CFR § 200.1.

If a grant recipient charges indirect costs based on an approved ICRA, a copy of the agreement must be submitted along with application Form 13424-J, Detailed Budget Worksheet and Narrative Explanations.

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iii. Meeting the Matching Funds Requirement

Grant recipients must provide matching funds on a dollar-for-dollar basis for all federal LITC grant funds received. See IRC § 7526(c)(5). In general, the Uniform Guidance provides that all contributions, including cash and thirdparty in-kind, can be accepted as matching funds when such contributions are:

n Verifiable from the grant recipient’s records. See 2 CFR § 200.306(b)(1);

n Not used as a match or contribution for any other federal award. See 2 CFR § 200.306(b)(2);

n Necessary and reasonable for accomplishment of LITC Program objectives. See 2 CFR § 200.306(b)(3);

n Allowable under the applicable cost principles. See 2 CFR § 200.306(b)(4);

n Not paid by the federal government under another award, except when authorized by federal statute. See

2 CFR § 200.306(B)(5);

n Provided for in the grant recipient’s approved budget. See 2 CFR § 200.306(b)(6); and

n In conformity with other applicable provisions of the Uniform Guidance. See 2 CFR § 200.306(b)(7).

Qualified matching funds can be from multiple sources and include cash, volunteer services, property, and income from program activities. Third-party in-kind contributions, defined in 2 CFR § 200.1, are the value of non-cash contributions such as property or services, that (a) benefit a project or program funded by a federal award and (b) are contributed by non-federal third parties, without charge, to a non-federal entity under a federal award. Grants may be awarded based on good faith estimates of matching funds, including verifiable pledge commitments or other likely sources of funding. However, grant recipients are advised to monitor the sources and uses of matching funds throughout the grant year to ensure that sufficient matching funds are available to meet the dollar-for-dollar match requirement in IRC § 7526(c)(5). Failure to document the sources and amounts of all matching funds may result in the LITC Program Office requiring the grant recipient to repay federal funds (plus any applicable interest) received in excess of the documented match. Failure to repay the funds within 90 days after the demand results in a debt to the federal government that can be collected by the IRS in accordance with 2 CFR § 200.346.

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Figure 4, Qualified and Ineligible Matching Funds

If an individual on the LITC staff receives an award or fellowship from a non-federal source, such as the ABA Section of Taxation Public Service Fellowship, the amount of the award may be included as matching funds to the extent the award proceeds are used to support LITC activities.

Valuing Contributions of Goods and Services to Meet the Matching Funds Requirement

Contributions of goods and services provided to a grant recipient must be valued in accordance with applicable cost principles. These principles generally limit values to:

n The amount a prudent person would pay for the goods or services in an arm’s length transaction under the

circumstances prevailing at the time the cost was incurred. See 2 CFR § 200.404(b); or

n Fair market value. See 2 CFR § 200.404(c).

Non-cash contributions, such as goods, space, or volunteer services donated to the LITC, from parties other than the grant recipient or the federal government ( i.e., third-party in-kind contributions) must be valued in accordance with the principles stated in 2 CFR § 200.306 (except for contributions of certain volunteer services by a qualified representative governed by 2 CFR § 1000.306).

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Determining the Value of Volunteer Services

The rates used to value volunteer services must be consistent with those paid for similar work in the organization and may include a reasonable amount for fringe benefits. If no one else on staff performs similar work that could provide a basis for comparative valuation, the organization must use a rate consistent with the labor market rate for similar work. One source of wage rates by geographic area can be found on the Bureau of Labor Statistics (BLS) website at https://www.bls.gov/bls/blswage.htm. However, BLS data represents a wage rate only, and when used to determine a volunteer services valuation rate, it can be adjusted upward by adding a reasonable fringe benefits amount.

If a third-party employer, such as a local law firm’s pro bono program, provides one of its employees to work for the applicant at no cost, those services are valued at the employee’s regular rate of pay plus reasonable fringe benefits, provided the services are in the same skillset for which the employee is normally paid. If a local law firm provided ten hours of volunteer service from an associate attorney in its tax division to an LITC, the LITC could value those ten hours at the attorney’s regular rate of pay at the law firm plus reasonable fringe benefits, provided the attorney performs ten hours of substantive legal work. See 2 CFR § 200.306(f).

Valuation Depends on the Type of Services

Grant recipients should also be mindful that a volunteer may meet the definition of a qualified representative yet may be providing services to the clinic in a non-representative capacity. In the previous example, if the attorney spent ten hours repainting the lobby of the LITC over a weekend instead of performing legal work, the LITC could still count the volunteer’s time as matching funds; however, it would need to value the attorney’s time at the rate for hiring a painter in the local labor market plus reasonable fringe benefits.

Services Donated by Employees May Not Be Used as Matching Contributions

An employee of the grant recipient may not be treated as a volunteer for purposes of valuing in-kind services. For example, suppose an LITC pays an employee an hourly wage to work at the LITC three days a week, and the employee spends an additional two days each week volunteering at the LITC. In the example, the LITC may charge the employee’s wages as an expenditure of federal or matching funds, but it cannot apply the value of the two days spent volunteering as a contribution to help meet the matching funds requirement.

Special Rule for Valuing Volunteer Services of a Qualified Representative

When the Treasury Department implemented the cost principles of 2 CFR § 200.306, it provided that notwithstanding the general rule prescribed in § 200.306(e), LITCs may use the rate found in IRC § 7430 to value volunteer in-kind services, if the following conditions are met: ⁸

n The grant recipient is funded to provide controversy representation;

n Services are provided by a qualified representative, which includes any individual, whether or not an attorney,

who is authorized to represent taxpayers before the IRS or an applicable court;

n The qualified representative is not a student; and

n The qualified representative is acting in a representative capacity and is advocating for a taxpayer.

Unless all the above criteria are met, grant recipients should apply the standard cost principles from 2 CFR § 200.306 as described above. IRC § 7430 provides taxpayers a right to an award of costs and fees for services provided by qualified representatives in suits against the United States when the statutory requirements of

8 See 2 CFR § 1000.306.

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IRC § 7430 are satisfied. The rate at which to value those services is adjusted periodically for inflation. For the 2026 calendar year, the maximum rate is $260 per hour, as prescribed in Revenue Procedure 2025-32, 2025-45 IRB 707 unless the representative can establish that a special factor, as described in IRC § 7430(c)(1)(B)(iii), applies.

The LITC Program Office encourages applicants with questions about how to value volunteer services to contact the program office for assistance; current grant recipients should contact their assigned Advocacy Analyst.

BEST PRACTICE

Use multiple sources of matching funds, such as state, local, private, and in-kind when possible to ensure financial stability. If any one source is unexpectedly reduced or lost, having different sources of match will allow a clinic to look to the other sources of match to make up the difference and avoid having to repay the federal funds.

iv. Office of Management and Budget Audit Requirement

A grant recipient that expends $1,000,000 or more in total federal awards during a fiscal year is subject to the audit requirements established by OMB. See 2 CFR § 200.501. Total federal funds expended by the organization includes all sources of federal funding, not just the funds received from the IRS to support the LITC. See 2 CFR § 200.502. The IRS may audit expenditures of LITC funds regardless of the dollar amount of federal funding received by the grant recipient.

A grant recipient that expends $1,000,000 or more in federal awards during a fiscal year must provide the IRS with a copy of the results of an audit performed in compliance with the Uniform Guidance or post it to the Federal Audit Clearinghouse at https://harvester.census.gov/facweb. If the most recent audit showed an unfavorable finding, it will not automatically disqualify the grant recipient; however, more information may be requested to ensure any deficiencies noted in the audit have been corrected. Grant recipients subject to the audit requirement must arrange for an audit by an independent auditor in accordance with the Government Auditing Standards developed by the Comptroller General of the United States.

If an audit is required pursuant to 2 CFR Part 200, it must be organization-wide. The auditor must determine whether the organization:

n Offers financial statements that present fairly its financial position and the results of its operations in

accordance with generally accepted accounting principles;

n Maintains internal controls sufficient to reasonably assure that the grant recipient is complying with

applicable laws and regulations, particularly the laws and regulations that could materially impact the financial statements; and

n Complies with laws and regulations that may have a direct and material effect on its financial statement

amounts and on each major federal program.

A reasonably proportionate share of the costs of an audit performed in compliance with the Uniform Guidance is an allowable LITC grant expense.

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LITC Program Office Cannot Provide Grant Payment History for an Audit

OMB audits often require historical grant payment information. This information is not available from the LITC Program Office. Clinics should direct auditors to the Payment Management System website at https://pms.psc.gov/grant-recipients/audit-confirmation-procedures.html. This will help avoid the delay that occurs when the LITC Program Office has to redirect auditors to the proper source.

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