J. Pre-Examination Considerations — 0824 Publ 5580 (PDF)

(1) If a copy of the determination file isn’t already in the file, follow the requirements

in IRM 4.70.12, Planning the Examinations, to request and review a copy You may receive a copy on disk, via secure e-mail, or via Teams. For private foundations, focus additional attention on:

a. Who are the founders, initial substantial contributors, and foundation

managers?

b. What is the purpose of the foundation (actively operating, grant-making, and

so forth)?

c. Did the organization request advance approval of individual grant-making

under 4945(g)?

d. If grant-making, what criteria were provided, and what constitutes the

applicant pool?

e. What assets were donated to form the corpus of the foundation?

f. Who contributed the assets?

(2) Make note of whether the articles of incorporation, association, or trust document

contains the Section 508 language. See Publication (Pub.) 557. Note that most states now incorporate the language into state law, thus eliminating the requirement to have the language in the document. See Treas. Reg. 1.508-3(d). If the language is present, note all who signed the document.

Note: When encountering a Chapter 42 violation, be sure to incorporate this information into the report of examination, if relevant to the party committing the transaction (self-dealers, foundation managers). This helps establish that at a minimum the founders acknowledged these restrictions in the governing instruments at the time the foundation was formed.

(3) If the application and/or tax return list a website address for the foundation, visit

the website and determine whether the information matches the information in the application. Note any changes from the application materials. Compare contact information provided to the tax return and the application.

(4) Obtain copies of prior and subsequent Forms 990-PF and Forms 990-T via

Online SEIN.

a. Review the Forms 990-T to determine the sources of income reported.

b. Using the Forms 990-T as a guide, add to the initial Information Document

Request (IDR) any items on the Form 990-T that merit review.

c. Match the income and expenses reported on the Form 990-PF to the Form

990-T. Note any differences. Note whether there may be allocation issues.

d. Perform the standard risk analysis, identifying the large, unusual, and

questionable items for inclusion on the IDR.

Note: Regarding the filing requirements for private foundations, for tax years beginning on or after July 2, 2019, Section 3101 of P.L. 116-25 (Taxpayer First Act of 2019) requires that returns by exempt organizations be filed electronically. See Section 6033(n). If an organization is filing Form 990-PF Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation, for a tax year beginning on or after July 2, 2019, the organization must file the return electronically. Limited exceptions apply. Electronic filing requirements have not changed for Form 990-PF filers with tax years beginning before July 1, 2019 (which includes calendar year 2019 Forms 990-PF). Required electronic filing for calendar year filers will apply for tax years beginning in 2020 or later. In addition, private foundations must file Form 4720 electronically for returns due on or after July 15, 2021. A limited exception applies for 2020 Form 4720 returns due on or after July 15, 2021, that are submitted on paper and bear a postmark date on or before June 16, 2021.

Reminder: Private foundations can be subject to the Form 990-T filing requirement for the same reasons as a public charity. The foundation is permitted to generate income within the limitations set by Chapter 42. An unrelated business directly conducted by a foundation, however, may constitute an excess business holding as a “sole proprietorship” business enterprise. See Section 4943(c)(3)(B) and Treas. Reg. 53.4943-10(e). Exceptions apply to a proprietorship described in Section 4943(d)(3).

(5) Obtain IDRS transcripts for the foundation and the disqualified persons. Perform

Accurint research on the disqualified persons. Review the completed research for possible compliance issues (such as missing returns, prior Chapter 42 liabilities, same disqualified person and foundation addresses, foundation vehicles registered under disqualified persons, payments to disqualified person businesses listed on the Form 990-PF).

(6) Review the Form 990-PF for the period(s) under examination in the following

sequence:

3	Apply the rules of IRC Section 7502 (timely mailing treated as timely filing).
Analyze the first page, Letters A through J (in the top third of the page)
1	Note the accounting method.
2	Note whether this is an initial, amended, or final return.
3	Determine whether there has been a name or address change.
4	Check whether a foreign foundation and percentage of foreign support (for purposes of Section 4948(b).
5	Check for unusual events: prospective exemption, 507(b)(1)(A) termination, 507(b)(1)(B) conversion.
6	Note the type of entity.
Review Parts VII-A and VII-B, Statements Regarding Activities
1	Verify the presence of all required schedules. Note any missing documents.
2	Check for an FBAR, if indicated.
3	Determine the liability for Form 4720.
4	Note any private benefit disclosures.
Review Part VIII, Information About Officers, Directors, Trustees, Foundation Managers, Highly Paid Employees, and Contractors
1	Match the amounts reported to the Forms W-2. (Use command code IRPTRR to retrieve the Forms W-2.)
2	Note the top paid individuals and contractors. Match to the list of founders, substantial contributors, and foundation managers reported in the determination application and in Part XV. (May be subject to IRC Section 4941.)
Review XVII, Information Regarding Transfers to and Transactions and Relationships With Noncharitable Exempt Organizations
1	Identify any large, unusual, or questionable items.
2	Verify the non-charitable entities exemptions on IDRS.
3	Print the INOLES/BMFOLO information for each non-charitable entity.
4	Use Online SEIN to obtain copies of the Forms 990 or 990-EZ for each entity.
5	Check EO Select Check for electronic postcard information.
6	See if there are any related parties on the board of each entity.
Review Part XV, Supplementary Information

1	Identify any large, unusual, or questionable items.
2	Compare any entries to information from the determination application.
Review Part IV, Capital Gains and Losses for Tax on Investment Income
1	Verify the math. Note any errors.
2	Identify any large, unusual, or questionable items.
3	Note the type of asset(s) for future reference in the interview and IDR.
Review Part I, Analysis of Revenue and Expenses
1	Verify the math. Note any errors.
2	Identify any large, unusual, or questionable items.
Review Part XVI-A, Analysis of Income-Producing Activities and Part XVI-B, Relationship of Activities to the Accomplishment of Exempt Purposes
1	Verify the math. Note any errors.
2	Identify any large, unusual, or questionable items.
3	Compare to Part I. Note any differences.
4	Compare to any filed Forms 990-T. Note any differences.
Review Part II, Balance Sheets **	Review Part II, Balance Sheets **
1	Verify the math. Note any errors.
2	Identify any large, unusual, or questionable items.
3	Check for any attached schedules. Note any missing schedules.
4	Compare any amounts on the attached schedules to Part II. Note any differences.
**There are new reporting standards for net assets, and Part II of Form 990- PF was updated to reflect the Financial Accounting Standards Board’s (FASB’s) reclassification of net assets into two classes, net assets without donor restrictions and net assets with donor restrictions.
Review Part III, Analysis of Changes in Net Assets or Fund Balances
1	Verify the math. Note any errors.
2	Note any increases or decreases not included in Part I, Line 27a. Determine whether such amounts should be included in Part I.
Review Part IX, Summary of Direct Charitable Activities, Summary of Program-Related Investments
1	Identify any large, unusual, or questionable items.

Note: The above method of reviewing the Form 990-PF is based on the sequencing chart for completing the Form 990-PF (Instructions for Form 990-PF).

(7) Review any information in the case file from Classification. Prepare to start an

administrative record if there are indicators of potential exemption issues. See IRM 4.70.14, Resolving the Examination.

(8) Modify the initial interview/questionnaire to incorporate any items identified during

the review of the application and tax returns. Additional questions to ask:

a. Please describe the relationship, if any, between the foundation manager(s),

founder(s), and any substantial contributor(s). (If all the same person, don’t ask.)

b. Please explain your understanding of the Chapter 42 provisions/prohibitions.

(9) Incorporate the items noted from analyzing the application and the tax returns.

When asking for financial information, you can ask for the supporting source documents, such as bank statements and cancelled checks, for up to five years back. For private operating foundations, Form 990-PF Part XIV supports the request of records for the three prior years.

Note: When asking for the records, indicate the basis for the request. (For example, “Please provide the bank statements and cancelled checks for the years XXXX through YYYY to support the amounts reported on the Form 990PF.”)

Caution: If you identify any self-dealing transactions or taxable expenditures in prior years, ensure that the statute is still open before pursuing the issue. Discuss with your manager regarding requesting a Counsel memo on a six-year statute, if applicable.

(10) Consider requesting these additional items in the IDR:

a. A list of all disqualified persons with respect to the foundation, including

government officials with which the foundation had any interactions, and a

brief explanation of why each is a disqualified person (for example “daughter of substantial contributor (Mr. X)”).

b. A list of all business enterprises owned in whole or in part by the foundation

and percentage of ownership for the foundation and disqualified persons. See Form 990-PF.

c. The list of all scholarship and grant recipients who were awarded a grant or

received a payment.

d. Relationship information of the scholarship/grant recipients to the founder(s),

substantial contributor(s), foundation manager(s) and any other disqualified persons.

e. Copies of the scholarship/grant criteria and any application forms.

f. Copies of any such applications and other grant request forms received.

g. Title documents to any foundation owned real property.

h. Compensation contracts for the foundation manager(s).

i. Notes and other loan documents involving disqualified persons.

j. Review of the general ledger and bank statements for transactions with disqualified persons.

k. Leases, partnership agreements, and all contracts between the foundation

and disqualified persons.

l. Credit card statements of the foundation as well as credit card statements of the disqualified persons, if applicable.

m. Travel expenses incurred by the foundation on behalf of disqualified persons.