IRS Tutorial Explains the Special Rules for International Activities of U.S. Charities

The IRS presents webinars on a variety of subjects.  In August, the IRS presented a webinar conducted by two IRS representatives on the special rules affecting charities that make grants to foreign organizations or engage in activities in foreign countries.


In a fairly comprehensive course, the following significant points were made:


1.    A U.S. charity can do anything in a foreign country that it can do here, provided that the activity is consistent with the charity’s exempt purposes.


2.    For purposes of the rule that a charity may not devote a substantial part of its activities to legislative lobbying:


a.    lobbying includes action by the public in a referendum, ballot initiative, constitutional amendment or similar procedure;


b.    actions by executive, judicial or administrative bodies are not considered legislation;


c.    legislation includes foreign laws; and


d.    in certain countries ruled by authoritarian or theocratic regimes, it is questionable whether the governing body is a legislature or if a legislative process even exists.

3.    A charity is prohibited from directly or indirectly participating in a political campaign of a candidate for a foreign public office, and may not make a contribution to any such campaign.


4.    In a country ruled by a dictatorship, a charity’s criticism of the regime in the course of advocating for democracy, the rule of law or human rights would not ordinarily be regarded as intervention in a political campaign.


5.    The operation of a foreign school must meet the same non-discrimination requirements that are mandatory for domestic schools.


6.    A charity must exercise reasonable care to ensure that its assets are used for charitable purposes.  A charity can demonstrate that it exercised this care by:


a.    maintaining procedures for properly vetting a foreign grantee, such as requiring a written application from the grantee and conducting background checks;


b.    entering into an agreement with the foreign grantee that sets forth the purpose of the grant; and


c.    exercising oversight of the grant to ensure that the grant is used as intended.


7.    Proper documentation may include periodic reports, accounting of expenses, copies of receipts, reports of on site visits by agents of the granting charity and photos and videos showing the charitable program.


8.    The charity should review the reports and take corrective action, where appropriate.


9.    A charity’s exempt status can be revoked if the charity makes grants to foreign organizations and it cannot demonstrate that the grants were actually used for exempt purposes.


10.    If a corporation makes a contribution to a charitable trust, the funds must be used within the United States in order for the contribution to be tax deductible.


11.    Contributors may not earmark funds for the use or benefit of any specific organization or individual.


12.    Contributors may designate their contributions to go to a specific purpose such as earthquake relief.  A charity may also accept non-binding recommendations or advice from donors.


13.    “Friends of” charities must exercise discretion and control over the funds they raise.  The IRS looks at the following positive factors:


a.    whether the charter provides that the board has discretion to allocate funds raised to any charity;


b.    whether the bylaws provide that the board will review all requests for funds, require that the requests specify the proposed use of the funds and require a periodic accounting of funds granted;


c.    whether the bylaws allow the charity to solicit funds for a specific project or purpose approved by the charity, but retain the charity’s right to withdraw approval of the grant and use the funds for other purposes; and


d.    whether the charity makes these policies known to donors upon request, and refuses to accept contributions earmarked so that they must go to the foreign organization.


14.    A donor-advised fund may not make a grant to individuals or make any grant for non-charitable purposes.


15.    A Type III supporting organization may not support an organization that is not organized in the United States.


16.    A charity may distribute funds to foreign organizations that are not charities.  The U.S. charity must be sure that the funds are used for specific projects that further its own exempt purposes.  It must keep records and show it controls the distribution of the funds.  The charity can demonstrate that it exercises such control by implementing the following procedures:


a.    engaging in an independent decision-making process (with no requirement that the charity listen to the donor’s direction) about whether it will provide funds to a foreign organization;


b.    conducting a pre-grant inquiry to be reasonably sure that the grant will be used for exempt purposes;


c.    entering into a written agreement with the recipient regarding the use of the funds; and


d.    obtaining reports that the funds were used for approved exempt purposes.


17.    Charities, in conducting their foreign activities and grantmaking, should be mindful of the sanctions programs of the Treasury Department’s Office of Foreign Asset Control known as OFAC.  OFAC has programs that ban a broad range of programs in or with certain countries.  In some cases a charity may need to obtain a license from OFAC in order to conduct the activity.


18.    OFAC has a program that forbids transactions with specific named individuals and organizations.  A list of names is available on the OFAC website.  Violations of these programs can lead to civil fines and criminal penalties.


19.    The Commerce Department’s Bureau of Industry and Security (BIS) also restricts export of certain equipment and technology to certain countries.  Information in this program is available on the BIS website.


20.    Charities that have foreign investments may have to file certain information returns (besides the 990) such as:


a.    Forms 926 and 5471 relating to foreign corporations;


b.    Forms 3520 and 3520-A relating to foreign trusts and foreign gifts;


c.    Form 8621 relating to passive foreign investment companies and qualified electing funds; and


d.    Form 8865 relating to foreign partnerships.


21.    Under the income tax withholding rules, a charity that makes a payment to a nonresident alien or a foreign organization, such as compensation for services performed in the United States, may need to withhold tax on a portion of the payment and pay it over to the IRS.


22.    If a charity has a financial interest in or signature authority over a foreign financial account, such as a bank account, brokerage account, mutual fund or trust and the aggregate value in the accounts exceeds $10,000 at any time, then the charity may be required to file Form 90-22.1, popularly known as FBAR


23.    Failure to file an FBAR when required to do so may result in civil penalties and criminal penalties.  If a charity failed to file an FBAR for earlier years, it should file the delinquent reports and attach a statement explaining why the reports are late.