May 2016

10 Steps to a Successful Audit

Preparing for an audit can be overwhelming. The AICPA compiled their top tips to ensure a smooth audit process.

In the coming weeks, Edelstein & Company will be posting a white paper that discusses the issues created when donors use their donor advised funds (“DAF”) or private foundations (“PF”) to satisfy personal pledges. Donors who use a DAF to honor a personal pledge may violate the prohibited benefit rule because the charitable assets of the DAF are being used to satisfy an individual’s legal obligation. Once a donor contributes to their DAF, they cease to have control of those assets. Similarly, using PF assets to honor a personal pledge may violate self-dealing laws. IRS self-dealing rules prohibit transactions between the PF and disqualified persons. Donors who are also founders of their PF are often considered disqualified persons.

What options do charities have when an individual donor indicates that they intend to pay a pledge through their DAF or private foundation? Some charities have set up procedures to record a non-binding gift intention, but this arrangement should not be recorded as a pledge on the charity’s books.

Charities often do not know that a pledge is being funded by a donor’s DAF or PF until the check is received. The decision then comes as to whether the pledge should be maintained on the books or written off. We recommend that charities post their gift policies on their website and work to educate donors about the best way for them to support their charity. Our white paper will present more information on this topic.

A bi-partisan bill (S.7250) was introduced on April 6 that would expand tax incentives and encourage greater charitable giving. The bill seeks to replace the two-tiered excise tax on net investment income of private foundations with a single 1% tax and allow donor advised funds to receive charitable IRA distributions. Other provisions would require all tax-exempt organizations to file their information returns electronically and authorize the standard mileage deduction rate for using a personal vehicle for volunteer work with the rate for medical or moving expenses.

The IRS has issued final regulations on program-related investments (PRIs) (T.D. 9762) for private foundations. Modifications to the proposed regulations issued four years ago were made to areas such as investments in subsidiaries and the liquidation of stock. These new regs added nine examples of PRIs to the ones that have been in place since 1972.