Expenditure Responsibility for International Grants: IRS Rules and Reporting

Expenditure responsibility for international grants is the oversight process a private foundation must follow under Internal Revenue Code Section 4945(h) whenever it grants money to a foreign organization that the IRS has not recognized as a public charity. In practice it comes down to three duties: making sure the grant is used only for charitable purposes, collecting detailed spending reports from the grantee, and reporting those details to the IRS every year any portion of the grant remains unspent.¹ Getting any piece of it wrong turns the grant into a taxable expenditure, and the excise tax starts at 20 percent of the grant amount.

When the Rules Apply

Expenditure responsibility is triggered by the grantee’s tax status, not by geography. A foundation must exercise it whenever the grantee is not recognized as a public charity under Section 509(a)(1), 509(a)(2), or 509(a)(3). Most foreign organizations fall into that category simply because they have never sought an IRS determination letter. Without one, the IRS treats a grant to the foreign entity as a taxable expenditure unless the foundation either exercises expenditure responsibility or obtains an equivalency determination.²

The rules also reach domestic and foreign private foundations regardless of location. On the other side, a grant to a foreign organization that has actually received an IRS determination as a Section 509(a)(1) public charity carries no expenditure responsibility obligation at all.

Two Ways to Skip the Process

Before starting the full oversight process, it’s worth knowing that two alternatives exist.

The first is an equivalency determination: a formal written conclusion by a qualified tax practitioner that the foreign grantee would meet the IRS definition of a public charity if it were organized under U.S. law. If the determination holds up, the foundation can treat the grant as a qualifying distribution without exercising expenditure responsibility.² The practitioner must be an attorney, CPA, or enrolled agent subject to IRS Circular 230 standards, and the written advice must document the grantee’s governance, finances, and charitable operations in enough detail to support the conclusion. A foundation can generally rely on a single determination for up to two years, and for grantees meeting the public support test over a five-year measurement period, the advice remains current for the two taxable years immediately following that period.³ For foundations that plan repeat grants to the same grantee, this often costs less over time than year-after-year expenditure responsibility.

The second option is granting through a U.S. intermediary, often called a “Friends of” organization. Because the money goes to a recognized U.S. public charity rather than the foreign entity, no expenditure responsibility or equivalency determination is required. The catch is that the U.S. charity must exercise genuine discretion and control over the funds. If it simply passes money through at the foundation’s direction, the IRS can treat the arrangement as a conduit and hold the foundation responsible as though the grant went directly overseas.

Pre-Grant Inquiry

When the foundation decides to grant directly under expenditure responsibility, the first step is a written investigation of the prospective grantee before any money moves. The inquiry covers identity, track record, management, activities, and financial practices, and the IRS expects the depth to vary with the grant size, the payment timeline, and whether the foundation has worked with the grantee before.⁴

In practice this means obtaining English translations of the founding documents, reviewing the backgrounds of board members and key officers, examining financial statements or past audits, and confirming the organization’s legal status in its home country. The foundation should also check whether the grantee has a track record with other donors. Missing audit records, frequent leadership turnover, or a history of donor complaints all weigh against proceeding. A written pre-grant report gives the foundation a defensible record of its due diligence if the IRS questions the grant later.

OFAC and Sanctions Screening

Separately from anything the IRS requires, federal law bars U.S. persons and organizations from transacting with anyone on the Treasury Department’s Specially Designated Nationals list. That prohibition reaches every international grant a foundation makes. A transfer to a person or organization on the SDN list can result in asset freezes, civil penalties, loss of tax-exempt status, and criminal prosecution.

Before disbursing funds, staff should screen the grantee, its board, and key personnel against the SDN list, which OFAC publishes in searchable formats.⁵ Potential matches should be investigated further, and significant similarities that survive that review should be reported through OFAC’s hotline. Many foundations also screen against the United Nations Security Council sanctions list and the European Union terrorist list, especially for grants in conflict-affected regions. Treasury recommends a risk-based approach, meaning the depth of screening should reflect the risk profile of the grantee and where it operates.

Required Terms of the Grant Agreement

Once the pre-grant work is done, the foundation and grantee sign a written agreement. Treasury Regulation Section 53.4945-5(b)(3) sets out mandatory provisions, and leaving any of them out can turn the entire grant into a taxable expenditure. The agreement must be signed by an appropriate officer, director, or trustee of the grantee and must include all of the following commitments:⁶

Return of any grant funds not used for the stated charitable purposes.
Annual reports on how the money was spent and what progress was made, plus a final report when the project concludes.
Maintenance of financial records (receipts, invoices, payroll documentation) and access to the grantee’s books at reasonable times.
No use of grant funds to influence legislation, intervene in political campaigns, conduct voter registration drives, make sub-grants that violate Section 4945(d)(3) or (4), or carry out any activity outside the scope of Section 170(c)(2)(B) charitable purposes.

The prohibition on sub-granting deserves close attention. If the foreign grantee plans to pass any portion of the funds to another organization, the agreement must address that explicitly, and the foundation’s expenditure responsibility obligations extend to those downstream uses.⁷ Foundations that overlook re-granting language often discover the problem only when a grantee report reveals money flowing to an unvetted third party.

For grants to foreign organizations specifically, the agreement must impose restrictions on fund use that are substantially equivalent to the limitations placed on domestic private foundations. A foundation can satisfy this requirement by obtaining an affidavit, opinion of counsel, or written advice from a qualified tax practitioner confirming the agreement meets that standard under the grantee’s local law or custom.⁶

Segregated Funds and Grantee Reports

After the money moves, the grantee has to keep it in a separate fund dedicated to the charitable project. Segregation from general operating accounts is a regulatory requirement, not a best practice, and it exists to prevent commingling and to create a clear audit trail.⁶ The grantee must keep records of all receipts and expenditures tied to the grant for at least four years after the funds are fully spent.

Annual grantee reports are the foundation’s primary monitoring tool. Each report should include a full accounting of expenditures organized by the approved budget categories, along with a narrative update on progress toward the charitable goals. Reports continue every year until the entire grant is spent and the foundation has received a final report confirming completion and compliance.

Capital Equipment and Building Grants

Grants that fund buildings or major equipment carry extra reporting duties. The grantee must submit reports covering the use of both the grant principal and any income the grant funds generate, for the taxable year in which the grant was made and the two following taxable years. The foundation can allow reporting to stop early only if it becomes reasonably apparent before the end of that second following year that neither the funds nor the purchased equipment have been used for any purpose that would trigger tax liability under Section 4945(d).⁶

Reporting to the IRS on Form 990-PF

The foundation’s own reporting obligation runs in parallel. Every year that any portion of an expenditure responsibility grant remains unspent, the foundation must attach a separate statement to its Form 990-PF containing seven items for each grant:⁸

The grantee’s name and address.
The date and amount of the grant.
The purpose of the grant.
The amounts spent by the grantee, based on the most recent report received.
Whether, to the foundation’s knowledge, the grantee has diverted any funds from the grant’s stated purpose.
The dates of any reports received from the grantee.
The date and results of any verification the foundation undertook regarding those reports.

The Form 990-PF itself also asks whether the foundation made any expenditure responsibility grants during the tax year and whether it has continuing obligations from prior-year grants.⁹ Multi-year grants generate a reporting entry on every return until the grantee has fully spent the funds and submitted a final report. Losing track of a small remaining balance on an old grant is a common way foundations end up out of compliance.

Penalties and Correction

A failure to properly exercise expenditure responsibility turns the grant into a taxable expenditure. The initial excise tax is 20 percent of the grant amount, paid by the foundation. If the problem is not corrected within the taxable period, a second-tier tax of 100 percent applies.¹

Foundation managers who knowingly approve an improper grant face personal liability. The initial tax on a manager is 5 percent of the taxable expenditure, capped at $10,000 per grant. A manager who refuses to help correct the problem faces an additional 50 percent tax, capped at $20,000. Multiple managers who share responsibility are jointly and severally liable.¹ Excise taxes are reported and paid on Form 4720, Schedule E, a separate filing from the Form 990-PF.¹⁰

If the problem is a reporting failure rather than a diversion of funds, the foundation can correct it by filing the missing or incomplete report. When funds were actually diverted, the foundation can avoid taxable expenditure treatment by acting promptly: taking all reasonable steps to recover the diverted funds or restore them to charitable use, withholding further payments until the grantee provides assurances against future diversions, and requiring extraordinary precautions going forward.¹¹ That first-diversion exception only works once per grantee. A second diversion by the same organization will not receive the same protection.

1
Office of the Law Revision Counsel. 26 USC 4945 – Taxes on Taxable Expenditures
2
Internal Revenue Service. Grants to Foreign Organizations by Private Foundations
3
Internal Revenue Service. Revenue Procedure 2017-53
4
Internal Revenue Service. Pre-Grant Inquiry
5
Office of Foreign Assets Control. Specially Designated Nationals (SDNs) and the SDN List
6
eCFR. 26 CFR 53.4945-5 – Grants to Organizations
7
Internal Revenue Service. IRC Section 4945(h) – Expenditure Responsibility
8
Internal Revenue Service. Reports to the Internal Revenue Service – Expenditure Responsibility
9
Internal Revenue Service. 2025 Instructions for Form 990-PF
10
Internal Revenue Service. Instructions for Form 4720
11
Internal Revenue Service. Violations of Expenditure Responsibility Requirements – Private Foundations