Record Retention for Foundations
Foundation recordkeeping is an inherently dull topic—unless it’s done wrong. The foundation manager who has not kept adequate documentation regarding expenditure responsibility grants risks an IRS audit. Similarly, a foundation manager confronted with a trustee succession battle will find the situation even more nerve-racking if they cannot put their hands on copies of the minutes of the meeting held years ago at which the succession issue was addressed and resolved.
There are documents that should be kept on hand forever, some that may be discarded after a given time period, and some that may be retained or discarded at a foundation's discretion. This article provides some guidelines for private foundations (including corporate foundations), giving programs that do not include a corporate foundation, and community foundations, their counsel, or their accountants.
Keep These Forever
Organizational documents, including the foundation’s certificate of incorporation or a copy of the deed of trust by which it was established, top the list of documents to be retained forever.
Tax documents follow closely. Correspondence with the Internal Revenue Service, including the foundation’s application for exemption and its determination letter, should also be accessible at all times. (Some older foundations will, of course, not have copies of their applications for exemption; the IRS rule on this subject is that any tax-exempt organization that filed its applications for exemption from income tax after July 15, 1987 or had a copy of its applications on hand as of that date must have a copy of the application and supporting papers available for public inspection). Copies of old tax returns should always be accessible (though older returns may be stored in a more remote location), as well as records from any IRS audit. State documents regarding the foundation’s tax status should also be carefully guarded.
The corporate giving program will have no incorporating documents, but it may have correspondence from the IRS. This should always be kept. Copies of the related corporation’s returns, or at least sections relating to charitable contributions, would be helpful to have on hand. Again, older information need not be kept in current files.
Records of contributions to a private foundation should be retained permanently, along with information about such contributions’ basis for tax purposes. These records will be necessary to determine private foundation excise taxes and, in certain circumstances, the aggregate tax benefit received by the foundation over time. The latter issue arises on occasion if the foundation transfers its assets to another private foundation.
Legal correspondence should always be kept. Opinion letters of counsel— and even less formal correspondence—may provide future foundation administrators with valuable information about how transactions were structured and why particular courses of action were taken. Property records, insurance policies, and records relating to pensions and other retirement plans are also candidates for permanent retention. Signed originals of the foundation’s board minutes, including copies of any resolutions adopted, are essential to have available. Most board members will want to have on hand an up-to-date version of the foundation’s by-laws, if any. The foundation manager will want to have records showing changes that have been made in these rules over time.
The non-foundation corporate giving program may have by-laws or other operational guidelines that should be archived. Documents relating to board succession and governance may be especially helpful to keep available permanently.
Finally, annual reports and other published summaries of the foundation or corporate giving program’s activities are another candidate for permanent space in the file drawer or the bookshelf.
Keep These for Some Years
Documents relating to grants made should be kept for at least the period during which a foundation might be audited on tax returns reporting them. This period is generally three years; under certain circumstances, the audit window is six years, so the truly cautious administrator may want to keep documents on hand for up to seven years. (Returns may be examined and taxes assessed at any time if there has been a false return filed or a willful attempt made to evade tax).
For grants made to domestic public charities, the grant file need not be extensive, but it should provide evidence that the grantee was indeed a tax-exempt public charity. A copy of the grantee’s determination letter is helpful, but a notation that someone checked the IRS’s Cumulative List of Charitable Organizations (also known as Publication 78 or the Blue Book) and ascertained that the organization was a 501(c)(3) will also do. A foundation need not secure or retain a receipt from a grantee to document that the money was received, although many careful recordkeepers do so.
Documents relating to a grant made to a non-charitable grantee, a foreign grantee, or a non-public charity grantee for a charitable purpose should be more extensive. All written material relating to equivalency determinations and expenditure responsibility grants made by a private foundation should be in the grant file.
Grantmakers other than private foundations should have ample evidence to demonstrate that the grant was intended and used for charitable purposes. This should include any records of pre-grant investigations of the grantee, grant agreements, and follow-up reports signed in connection with the grant. There are special rules relating to the documents that must be retained in connection with private foundation grants to individuals for study or travel; see Reg. § 53.4945-4(c)(6).
Corporate foundations and giving programs that run matching gift programs should treat their payments under these arrangements as grants and keep documents relating to them for the same period (a minimum of three years, six or more if possible). Again, the important documents to keep in connection with each payment are those that show the tax-exempt status of the grantee.
While some financial records need to be kept forever, others need to be kept indefinitely but perhaps not until the end of time. Records of purchases of investment assets need to be kept until the assets are sold or otherwise disposed of, and for the duration of the audit period for the tax return on which the transaction is reported. Records regarding foundation transactions, such as purchases of office equipment and the like, need not be kept beyond the time necessary for tax reporting and the audit period that follows. Similarly, contracts for services generally need not be retained forever.
Records of contributions to community foundations generally fall into this category as well. Documents relating to cash contributions should be kept until tax reporting is complete and the audit period has ended. Records relating to a gift of securities should be kept until the securities are sold, the transaction is reported on the community foundation’s tax return, and the audit period has expired. Records relating to a gift of real property should probably be kept permanently.
The community foundation should also keep on hand records of its efforts to comply with the various disclosure rules in the Tax Code (regarding provision of goods and services to donors) until the expiration of the audit period relating to the gift or solicitation campaign. The community foundation should check with its counsel or state attorney general regarding whether and how long solicitation records must be kept for state purposes.
Personnel records constitute another body of documents that should be retained for some time but need not be permanently archived. The foundation’s accountant or lawyer will be helpful in sorting through the various required retention periods for these forms. For example, records relating to wages and various federal employment taxes must generally be kept for four years. Immigration and Naturalization Service (INS) Form I-9, which sets out an employee’s eligibility to work in the United States, must be kept for three years after the date of the employee’s hiring or one year after the employee’s termination, whichever is later.
Note that having personnel records available (even if they are not readily accessible) for longer periods may be wise. A former employee might make a claim relating to retirement benefits many years after the original date of employment. Information on the employee's compensation, bonuses, leaves of absence, and other aspects of his or her work history may be very useful in such a situation.
If the foundation has file space to keep these records longer than the required retention period, it may be useful to do so—but it's not essential.
Discard These at Your Discretion
Although many foundations keep a log of all inquiries received, there is no legal requirement that the actual requests for guidelines and rejected grant proposals be retained.
The argument for keeping some portion of rejected proposals is that these files allow grantmakers to compare old and new applications for funding. Is the applicant organization looking for support for the same project or a new activity? How has its personnel or budget changed since the unsuccessful application?
Additional Considerations
Where records should be kept and in what form records should be stored are decisions for the foundation to make in consultation with its counsel, accountants, and information service providers. For most purposes, either photocopies or original documents are adequate. Some records are appropriate to keep on microfiche or computer disk. The grantmaker’s available space and technology will help determine its actions.
Some grantmakers worry that keeping too many documents will lead to problems. They fear that newspaper reporters may request copies of rejected grant applications or that the IRS may choose to look into transactions in years long past if the records are available. These concerns should not prevent a grantmaker from retaining records. There is no legal requirement that rejected applications be made public, and the newspaper reporter may be told that the foundation has a policy of keeping rejected applications confidential in deference to the privacy concerns of the applicants. While the IRS may request to see all documents it believes to be relevant to the assessment of tax, the foundation’s counsel should help protect the foundation from too broad a review.
As any office worker knows, paper has a tendency to accumulate. A record retention policy can help grantmakers sort out the documents that need to kept on hand from the ones that can go into the recycling bin.
