Private foundations exist under the watchful eye of the United States Congress, which has delegated their oversight to the Internal Revenue Service. In each state, offices of the state attorneys general also bear regulatory responsibility, but because of the limited resources typically available for this purpose, the IRS is by default the only real regulator of foundations—except in instances where an attorney general has been alerted to the possibility of significant misbehavior by a foundation.
To obtain the information needed to exercise its regulatory responsibilities, the IRS relies principally on an annual filing by private foundations—the Form 990-PF tax return. While it also conducts periodic audits of individual foundations, the sheer number of organizations, together with the IRS’s record of reaping minimal revenue from costly audits, makes the 990-PF filing the overwhelming choice of regulatory tool. The 990-PF also provides foundations with an important tool for self-regulation, helps journalists serve as accountability watchdogs, and generates data used by the Foundation Center to maintain its databases and research reports on the foundation sector.2
If the 990-PF is a necessary requirement of private foundations, it is also a costly one: estimated total filing costs in 2008 for all foundations was $675 million (Exhibit 2).3 To put this number in perspective, it is the equivalent of the required payout for charitable purposes of a perpetual foundation with $13 billion in assets. Such a foundation would be the second largest, falling somewhere in between the Bill and Melinda Gates Foundation and the Ford Foundation. Further, combined 990-PF preparation costs are greater than the $552 million in average total annual excise tax receipts generated by the return.4 Clearly, the return should be structured for maximum efficiency so that it can meet its regulatory aims while minimizing forgone charitable expenditures.
This essay traces the history of the 990-PF to reveal how its current structure and content came to be. It then analyzes the return’s shortcomings and discusses how the 990-PF could be transformed into a more effective instrument for promoting accountability and best practices in the foundation sector. Although it will not be possible to implement all of the recommendations, in the debate over reform and simplification of our federal tax code, modernizing Form 990-PF should be given serious consideration.
To read the complete essay, download Modernizing the 990-PF to Advance the Accountability and Performance of Foundations: A Modest Proposal.
1 Foundation Yearbook, 2010 Edition, (New York: The Foundation Center), foundationcenter.org. Data are for 2008.
2 The privately funded and nonprofit Foundation Center maintains the most comprehensive database on U.S. and, increasingly, global grantmakers and their grants and operates
research, education, and training programs to advance knowledge of philanthropy.
3 Based on IRS estimates of average time requirements for different aspects of the filing process, in Internal Revenue Service, 2010 Instructions for Form 990-PF, p. 30, Paperwork Reduction Act Notice. Using the IRS’s time calculations and estimated hourly preparer rates, the average cost of filing the return is $9,000. Costs for individual foundations, of course, vary widely, depending on their size and complexity of operations. With a $650 million endowment, The Commonwealth Fund, for example, spends about $18,000 in preparing its annual tax return. The author thanks Commonwealth Fund controller Jeffry Haber for these estimates and for his other contributions to this paper.
4 See www.irs.gov/taxstats/charitablestats , IRS data files, average for the 1998–2008 filing years.