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Procedures Required for U.S Based Foundations to Give Donations to Foreign Organizations

Posted by ALEX CHEN | Apr 14, 2021 | 0 Comments

Philanthropy does not have to be limited to the United States. Your organization can, and should, distribute funds and charity worldwide. However, because the money does extend beyond international borders, the IRS requires additional verification to prove that the money is being used for proper purchases. After all, they don't want people donating their hard earned dollars to organizations who turn around and give it to their family or friends abroad!

So what is the process for this verification? The IRS verifies in two ways:

  1. Equivalency Determination (ED)According to the IRS, foundations can make grants to international organizations if the foundation has made a "good faith determination" that the foreign organization qualifies as a charity. This determination is demonstrated by a letter written by a qualified professional such as an attorney or CPA. While it may sound simple, the process can often be time-consuming and costly. The determination must be made after examining the foreign organization's documents and actions. These documents include financial and organizing documents, which some foreign organizations might be hesitant to provide. Because of this, some domestic organizations use the second tool of IRS verification.
  2. Expenditure Responsibility (ER)

Expenditure Responsibility (ER) is a set of procedures that ensure the money is being sent to a qualified organization. This includes having the foreign organization sign a grant agreement, limiting them on how to use the money and detailing how to document their expenditures. It would also include routine audits of how the money is being used by the foreign organization.

The main differences is the verification process - under ED, the foreign organization has its nonprofit status verified before the money is granted. After that, no additional reports are needed, and the foreign organization can rely on that determination for up to two years. Because no additional reports are needed, it gives the foreign organization more flexibility on how to use the money for those two years. Under ER, the verification process is ongoing while the money is disbursed and spent by the foreign organization. Some organizations might balk at handing their incorporating documents and financial information to a U.S nonprofit, and therefore, ER would be a better option. The downside with ER is that it would require constant audits on how the money is being used, which does not allow foreign organizations as much flexibility as they would have under an ED scheme. 

If you are planning on making a grant to a foreign organization, we can help you decide which process is better for your needs and we will do all the verification for you, whether it's an ED-style verification or ER-style verification. 

About the Author

ALEX CHEN

Alex Chen is a dedicated business and nonprofit law attorney working to help his clients achieve their entrepreneurial or philanthropic goals since 2017. Prior to this, he worked in the nonprofit legal sphere on immigration and family law. With this strong background, he brings years of experience as a committed advocate for his clients. Alex graduated from UCLA in 2010 and Loyola Law School in 2014, and is a member of the State Bar of California in good standing.

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