IRS Seeks Comments on Guidance, Practices to Prevent Fund Diversion for Terrorism - Nonprofit Issues

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Published: 05/05/2003

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IRS Seeks Comments on Guidance, Practices to Prevent Fund Diversion for Terrorism

The Internal Revenue Service (IRS) is seeking public comments on how it can improve guidance and oversight in order to prevent diversion of charitable assets for terrorist activities. Announcement 2003-29, which will be formally issued May 19, focuses on grants to international charities, but also asks about the appropriateness of issued by the Treasury Department last November. These practices are recommended for all charities, but were released without a public comment period. This announcement provides the nonprofit community with its first opportunity to be heard on the appropriateness of these practices.

The "voluntary best practices" cover governance, disclosure, transparency and financial practices. In addition, special procedures for groups that distribute funds to foreign organizations are listed. The guidelines include issues generally governed by state law, such as the contents of governing instruments, composition and meetings of boards of directors and solicitation of funds.

The area of public disclosure is the most problematic section of the guidelines, duplicating information that must be made public in IRS reporting in Form 990 (the annual information return filed by nonprofits), without the definitions and protections included in the IRS disclosure regulations. In other cases the guidelines exceed current disclosure rules by saying charities should "provide upon request an annual report" and maintain records of "all decisions made" that are made available for public inspection.

In the area of international grantmaking, the IRS asks for comments on whether current rules can be improved to prevent diversion of funds for non-charitable purposes. The announcement asks for information about what safeguards are currently used, what changes were made after the attacks of September 11, 2001, what problems charities have encountered in monitoring international grants and what changes are suggested for IRS Forms 990, 990-PF (annual information returns) and 1023 (application for recognition of exemption).

The announcement is directed to public charities and private foundations. Comments are due July 18, 2003. See the text of Announcement 2003-29 for details.