CAP Documentation & Reporting 3 — Questions and Answers
Question 1: Which section of Form 990 requires a public charity to disclose its three highest-compensated independent contractors?
- Part VII
- Schedule J
- Part VII Section B (Correct answer)
- Schedule L
Correct answer: Part VII Section B
Form 990 Part VII Section B requires disclosure of the five highest-compensated independent contractors paid more than $100,000, providing transparency about significant outside relationships.
Question 2: A private operating foundation must annually demonstrate active conduct of its exempt programs. Which test satisfies this requirement?
- The expenditure test only
- The income test and at least one of the assets, endowment, or support tests (Correct answer)
- The minimum distribution requirement alone
- The public support test
Correct answer: The income test and at least one of the assets, endowment, or support tests
A private operating foundation must pass the income test (spending substantially all income on exempt programs) plus at least one of the assets, endowment, or support tests each year.
Question 3: What is the purpose of IRS Form 5227 filed by a charitable remainder trust?
- To report distributions to beneficiaries and trust assets annually (Correct answer)
- To apply for tax-exempt status
- To report unrelated business taxable income
- To elect S corporation status for trust assets
Correct answer: To report distributions to beneficiaries and trust assets annually
Form 5227 is the Split-Interest Trust Information Return, filed annually by charitable remainder trusts to report trust assets, income, distributions to income beneficiaries, and the charitable remainder interest.
Question 4: When a private foundation makes a grant to a foreign organization, what due diligence documentation standard applies?
- No additional documentation beyond a grant letter is required
- The foundation must conduct equivalency determination or expenditure responsibility (Correct answer)
- The foundation must obtain a pre-clearance letter from the IRS
- Only a Form 990-PF disclosure is required
Correct answer: The foundation must conduct equivalency determination or expenditure responsibility
To make grants to foreign organizations, private foundations must either obtain an equivalency determination (treating the foreign org as equivalent to a U.S. public charity) or exercise expenditure responsibility with detailed reporting.
Question 5: Under the Pension Protection Act of 2006, donor-advised funds are required to disclose which information on Form 990?
- Names of all individual donors who contributed more than $1,000
- Total number of donor-advised accounts, aggregate contributions, grants, and year-end value (Correct answer)
- Each individual DAF account balance separately
- All investment holdings within DAF accounts
Correct answer: Total number of donor-advised accounts, aggregate contributions, grants, and year-end value
Schedule D of Form 990 requires DAF sponsors to report the total number of accounts, aggregate value of contributions, grants made, and total year-end fair market value across all DAF accounts.
Question 6: A donor establishes a charitable lead annuity trust (CLAT). Which IRS form reports the CLAT's annual activity?
- Form 5227 (Correct answer)
- Form 1041
- Form 990-PF
- Form 706
Correct answer: Form 5227
Charitable lead trusts, like charitable remainder trusts, file Form 5227 (Split-Interest Trust Information Return) annually to report financial activity and the charitable lead interest.
Question 7: Which record-keeping requirement applies specifically to payroll deduction charitable contributions made by employees?
- Employees need only retain their W-2 showing total wages
- Employees must keep a pay stub or pledge card showing the amount withheld and the donee organization (Correct answer)
- No documentation is required for payroll deduction gifts under $250
- Employees must obtain a written acknowledgment from the charity for each paycheck deduction
Correct answer: Employees must keep a pay stub or pledge card showing the amount withheld and the donee organization
For payroll deduction contributions, the IRS allows a pay stub, W-2, or employer-prepared pledge card as the required documentation, in lieu of a written acknowledgment from the charity.
CAP Documentation & Reporting 3
Which section of Form 990 requires a public charity to disclose its three highest-compensated independent contractors?