If you’ve ever read through the IRS instructions for private foundations (and who hasn’t in their spare time?), you’ll have noticed that the IRS wants to know a lot about your organization. Some of the detail the IRS is looking for makes sense. For instance, asking for information about charitable disbursement recipients ensures that private foundations are distributing funds appropriately. However, other information the IRS wants seems to only needlessly increase the administrative burden on the organization, tax preparers, and even (gasp!) the IRS as well.
One of those areas that particularly screams “overkill” relates to the detail required to be provided for a private foundation’s investment holdings at the end of the year. According to the IRS instructions, private foundations need to attach a schedule that lists each security, even if it is publicly traded, that the organization held at the end of the year. The attachment must also include the security’s book and/or fair market value, depending on how the security’s value is listed on Part II, Line 10 of the organization’s 990-PF.
It is easy to see how reporting all of this information can get out of hand very quickly. Even small to mid-sized foundations tend to have enough investment holdings that their investment statements routinely run onto multiple pages. Indeed, in our experience, it is not uncommon for a private foundation’s investment attachment to exceed the thirteen pages of the full Form 990-PF itself.
Obviously, taking the time to manually enter each security and its value into tax preparation software would not be value-added time spent for tax preparers. Because of this, a copy of an organization’s investment portfolio statement usually has to be included with the return filing. Unfortunately, doing so precludes most private foundations from electronically filing their returns. Most tax preparation software that we have seen currently does not have a schema to allow for the electronic attachment of a PDF for Part II, Line 10 of the 990-PF. Because of this, many private foundations are forced to file their returns by paper.
This is likely an unintended consequence on the part of the IRS as they continue to increasingly mandate electronic filing of returns. However, it does beg the question as to the point of requiring so much detail to be attached. It is exceedingly hard to believe that anyone from the IRS is taking the time to go through this information with any degree of scrutiny. It is harder still to believe that even the most inquisitive reader of a private foundation’s tax return would consider this minutia with even a modicum of interest. In all likelihood, this information is not considered even in a passing review of a private foundation’s return and likely only comes to anyone’s attention during an IRS audit. If this be the case, would it not be easier for the IRS to request this information only if and when they select a foundation for an audit examination?
Ideally, the IRS will alleviate this reporting burden, perhaps by exempting publicly-traded securities unless the foundation owns a significant (say 10%) portion of the company. Indeed, a similar precedent has already been established by the IRS, which several years ago released guidance no longer requiring private foundations to list each individual sale of publicly-traded securities when reporting capital gains and losses. Unfortunately, there does not appear to be anything on the immediate horizon to address this concern in a similar fashion. Neither the IRS nor tax preparation software providers appear to be actively considering a change or work-around.