K. Field/Office Correspondence Exam

(1) Review any revised organizing documents. Verify that any Section 508 language

is included, if not covered by state law. Determine whether any changes have modified the exempt purpose or jeopardize the exemption.

(2) Perform the foundation status test. Verify whether the entity continues to fail to

qualify under Section 509(a) as a public charity.

Note: If the foundation satisfies the test for public charity status, inform the organization of the possibility of a Section 507(b)(1)(B) termination. To apply for an advance ruling the foundation must file Form 8940 with EO Determinations.

(3) Examine the financial statements and financial records. At a minimum, do the

following:

2	Do the same for the bank statements.
3	Compare the amounts to Form 990-PF Part X Line 1.
4	Identify the program related investments, if reported on Form 990- PF Part IX-B and determine whether they qualify as such.
5	Determine if there is any overlap between program related investments and non-charitable use investments.
6	Identify any assets purchased in the year(s) under examination.
7	Compare the asset purchase amounts to the amount reported in Part XII Line 2.
8	Determine any differences, verify whether any amounts are for non-charitable use.
9	Identify any amounts listed as set aside.
10	Verify that the set aside was appropriate.
11	Identify any acquisition indebtedness.
12	Determine whether Section 514 applies. If so, verify that a Form 990-T was filed and that it included the debt financed income.
13	Determine whether the acquisition indebtedness triggers IRC Section 4941 as a loan with a disqualified person (or as a deemed sale or exchange with a disqualified person because the foundation received property subject to a mortgage or similar lien as described in Section 4941(d)(2)(A)).
14	Determine whether any of the asset purchases trigger Section 4941 as a sale with a disqualified person.
15	Review the other assets of the organization.
16	Look at the title documents. Review for any questionable elements involving disqualified persons.
17	Inquire and verify whether the assets are being used by any dis- qualified persons.
18	Review the cancelled checks and check registers. Request explanations for questionable expenditures.
19	Inspect any receipts provided for the questionable expenditures.
20	Identify all payments that are grants or scholarships to disqualified persons.
21	Determine whether the payments meet the exceptions to Section 4941 and Section 4945.
22	Compare the Forms W-2/1099 to the amounts reported on Form 990-PF Part VIII and to the amounts reported in the register.
23	Determine whether there are any missing or incorrectly reported Forms W-2/1099.

(4) Determine how assets were used. Verify the relationship of the asset to the

exempt purposes of the foundation. Tour all foundation facilities. If the foundation

has real estate investment property tour those properties as well. Be aware of potential self-dealing acts such as DP’s having offices in the building or using the land. Does the foundation have artwork? Where is it located?

Note: Keep in mind that at times, potential self-dealing transactions may not show up in the books of the organization. For instance, the foundation may own property for investment purposes, such as ranch land. Do the disqualified persons use the land for recreation such as fishing or hunting?

(5) Using a blank Form 990-PF, revise the amounts reported according to the exam

findings. Changes to the return impact the Section 4940 tax and may trigger the Section 4942 tax. If you have reviewed the financial records from prior years, revise the prior year Forms 990-PF as needed. Use the modified information from the prior years to revise Parts V (as pertinent to years ending prior to December 20, 2019) and XIII of the exam year Form 990-PF.

(6) If you determine that amounts reported in Part I Column d aren’t charitable

expenditures, remove the amounts in your revised Form 990-PF. Self-dealing transactions and taxable expenditures generally should be removed from Part I Column d if previously reported as such. This in turn modifies Part XII, directly impacting the computations in Part XIII.

(7) Determine whether the foundation has:

a. Engaged in any self-dealing transactions.

b. Failed to make qualifying distributions.

c. Held or acquired excess business holdings.

d. Made jeopardizing investments.

e. Made taxable expenditures.

(8) If there are any acts/failures to act giving rise to Chapter 42 taxes, ensure that the

statute of limitations is protected. Request extensions from the foundation and from each disqualified person party to an act/failure to act. Open AIMS controls on BMF for the foundation and any business entities and on NMF for any individuals.

Note: For tax years beginning in 2020, an individual liable for a Chapter 42 excise tax won’[t have the option to file jointly with the organization with respect to which the excise tax relates. Beginning with tax year 2020, Form 4720 has been revised to identify whether the filer is the organization or an individual. Therefore, for tax years after 2019, an agent preparing Form 4720 to report individual excise tax liability during an examination will no longer convert Form 4720 to “Form 4720-A.” The revenue agent will, instead, complete Form 4720 identifying the filer as an individual as described in the instructions for Form 4720. See the instructions to the Form 4720 for further information.

(9) For any Chapter 42 taxes, prepare a report of examination for each liable party.

Ensure that there are no disclosure violations. See IRM 4.70.14, Resolving the

Examination, for the report letter and attachments. All excise tax reports include Forms 4621, 4883, 886-A and 870-E.

(10) If an act requires correction, verify that correction is made before closing an

agreed case. See IRM 4.70.14, Resolving the Examination, for the initial report, formal report, protest to Appeals, and rebuttal information.

(11) See IRM 4.70.14, Resolving the Examination, for information on the necessary

letters and forms to complete. However, before issuing a 30-day letter to a foundation manager proposing the second tier tax, you must first issue a Thorne letter. For help in drafting a Thorne letter, with your manager’s authorization, contact Area Counsel.

(12) For egregious cases, consider involuntary termination and revocation. Discuss

these possibilities with your group manager and Area Counsel before pursuing these actions. See IRM 4.70.14, Resolving the Examination, for information on preparing an administrative record.