WASHINGTON — Congress and the Biden administration are considering what, if anything, should be done to tighten restrictions on donor-advised funds, an increasingly popular way for donors to set aside money to spend on charitable causes.
Driving the debates are questions about whether the country’s ultrawealthy are abusing the immediate tax deductions they receive from tucking money into DAFs, where the dollars can sit indefinitely or, more often, until donors decide which nonprofits to support. Many in the nonprofit world have opposed that characterization, arguing the accounts allow for an easy, no-frills style of giving that appeals to both wealthy and average American donors.
This week, the Internal Revenue Service held a public hearing to discuss its plan to regulate DAFs. The proposals include: altering the definition of what constitutes a donor-advised fund so that it applies to a broader swath of accounts; expanding the definition of donor advisers to include personal investment advisers who help manage assets in DAFs; and imposing new penalties on those who abuse the funds. If approved, the IRS would impose a 20% excise tax on donations that provide significant benefit to the donor, among other changes.
In question is the IRS’s interpretation of a 2006 law signed by President George W. Bush, which laid out the first comprehensive set of policies for donor-advised funds.
The IRS seems to be concerned that “there are abuses out there and there’s money going places it probably shouldn’t,” said Lloyd Hitoshi Mayer, a law professor at the University of Notre Dame.
DAF supporters urged the IRS to revise its plan, with some arguing that the proposed restrictions would make donor-advised funds less attractive when charitable giving is already on the decline. The proposed regulations are just a start; they don’t really touch on the third-rail issue of whether to require payout to nonprofits on a timeline.
The IRS proposal comes amid mounting concerns about money piling up in DAFs, with some calling for tighter regulations. Nearly $230 billion has been stashed into DAFs, which have surpassed private foundations in popularity among a new generation of donors. There are now almost 2 million accounts, nearly double the number that existed in 2018, according to the National Philanthropic Trust, a leading sponsor of the funds, which also publishes an annual report on their growth. Donors can create accounts at any nonprofit “sponsoring…
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