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Correction of Taxable Expenditures - Private Foundation

The purpose of correction is to permit a private foundation and its managers to take all reasonable steps to return the foundation to the position it was in before it made the taxable expenditure.

In cases other than those of inadequate reporting or failure to obtain advance approval, discussed below, a correction is accomplished by recovering part or all of the expenditure to the extent possi­ble.  When full recovery is not possible, any addi­tional corrective action will be prescribed by the IRS.  The type of additional action depends on the circumstances, and the Service may require any of the following:

  1. Withholding any unpaid funds due a partic­ular grantee,
  2. Stopping further grants to the grantee,
  3. Periodic reports to the IRS from the foun­dation for all its expenditures,
  4. Improving methods of exercising expendi­ture responsibility,
  5. Improving methods of selecting recipients of individual grants, and
  6. Any other actions that the Service may prescribe in a particular case.

The foundation is not required to attempt recovery of the taxable expenditure by legal action if it appears a judgment could not be satisfied.

Correction for failure to obtain advance ap­proval.  When an expenditure is taxable as a grant for travel, study, etc., only because of a failure to obtain advance approval of procedures for those grants, correction may be accom­plished by obtaining approval of the grant-making procedures and establishing to the satisfaction of the Service that:

  1. No grant funds have been diverted to any use not for a purpose specified in the grant,
  2. The grant making procedures instituted would have been approved if advance ap­proval of the procedures had been prop­erly requested, and
  3. When advance approval of grant making procedures is later required, the approval will be properly requested.

Correction for inadequate reporting.  If an expenditure is taxable only because of a failure to make or obtain a full and complete report as required, correc­tion may be made by obtaining or making the report in question.

In addition, if the expenditure is taxable only because of a failure to obtain a full and complete report as required and an investigation indicates that no grant funds have been diverted to any use not for a purpose specified in the grant, correction will be accomplished if all reasonable efforts are made to obtain the report and the Service is notified of the failure to obtain the report.


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Page Last Reviewed or Updated: 29-Apr-2014