Why are EDs needed?

To comply with U.S. tax laws and regulations and requirements, including avoiding tax penalties, certain U.S. funders (including private foundations) must ensure that its funds are used solely to further its charitable purposes. One way to do this is by making grants to U.S. public charities. Public charities are subject to a thorough evaluation by the IRS to ensure that they are organized and operated exclusively for charitable purposes. In doing so, the IRS looks at the types of support an organization receives and the nature of its activities. While it is possible that some foreign organizations might seek public charity status directly from the IRS, most do not due to the financial and administrative burden associated with this process.

However, certain U.S. funders including private foundations can treat a foreign organization as equivalent to a US public charity if the foreign organization goes through the ED process. Once a foreign organization has been certified as the equivalent of a U.S. public charity, a funder may make grants to the foreign organization in the same way it would to a U.S. public charity. This is one very important way that a grantmaker can ensure that its grants to foreign organizations comply with U.S. tax laws without having to go through a more burdensome and time-consuming process called “expenditure responsibility” or “ER.”