Expenditure Responsibility: Why It Matters Beyond Private Foundations
Expenditure responsibility is a term nonprofit leaders often encounter in discussions about private foundations. It refers to a specific set of IRS rules that apply when private foundations award grant money to other organizations, especially noncharitable organizations or for activities outside the United States.
While expenditure responsibility technically applies only to private foundations, every public charity should be aware of the requirements and treat them as best practice guidelines. Ultimately, expenditure responsibility is about responsible stewardship of funds, and that’s something that should matter to every nonprofit.
What expenditure responsibility actually requires
Under IRS rules, private foundations are required to exercise expenditure responsibility in specific grantmaking situations. This includes grants to organizations that are not recognized as 501(c)(3)s and, in many cases, grants made outside the United States.
At a high level, expenditure responsibility requires foundations to:
Conduct due diligence before making a grant
Enter into written grant agreements that restrict how funds may be used
Require regular reporting on how funds are spent
Maintain documentation showing funds were used for charitable purposes
Take action if funds are misused, including recovery when appropriate
These requirements exist to ensure charitable assets are used exclusively for exempt purposes and not diverted to private benefit or prohibited activities.
The IRS outlines these expectations clearly in its guidance on grants by private foundations and audit technique guides available on their website.
Why it matters for public charities
Public charities are not subject to formal expenditure responsibility rules in most domestic grantmaking situations. However, they still need to ensure that all funds align with donor intent and the organization’s tax-exempt purpose.
When a public charity raises money for a specific purpose and then grants those funds to another organization, responsibility does not disappear simply because both entities are tax-exempt. If funds are raised for one charitable purpose and used for another, even indirectly, the organization may face donor complaints, scrutiny from the IRS, or both. If the public charity is awarding any grant funds to other organizations, following the expenditure responsibilities guidelines for private foundations helps ensure appropriate use of those funds.
When oversight becomes especially important
Certain grantmaking scenarios increase risk and warrant heightened diligence, regardless of organizational classification. Nonprofit foundations are required to follow the expenditure responsibility guidelines, and public charities can benefit from doing so as well, especially in these scenarios.
Grants made outside the United States
When funds are sent abroad, organizations should verify that funds are not supporting prohibited activities or sanctioned entities. This may involve vetting recipients, monitoring use of funds, and confirming compliance with federal restrictions, such as sanctions lists.
Purpose-restricted grants to other charities
Even when granting to another 501(c)(3), restrictions matter. If funds are raised for a specific program or outcome, the granting organization must be able to demonstrate to their donors and the IRS that those restrictions were honored throughout the grant lifecycle.
Grants based on informal agreements
Handshake agreements, emails without formal terms, or funds given to another organization with no documentation create risk for the organization. Without written agreements and reporting requirements, it becomes difficult to prove that funds were used appropriately if questions arise. Ensuring that appropriate grant applications and guidelines are in place protects all organizations.
Donor intent is not optional
When donors give in response to a stated purpose, campaign, or event, the organization is responsible for ensuring those funds are used as promised — even if they are granted to another organization. Granting funds onward does not transfer that obligation.
As a best practice, organizations should:
Use written grant agreements
Require expenditure or outcome reports
Reserve the right to withhold or recover funds if terms are violated
Maintain documentation that demonstrates compliance
These safeguards align with the expenditure responsibility required of private foundations, but they reflect basic governance and risk management principles for all nonprofit organizations.
Beyond technical compliance
Responsible stewardship of organizational funds protects the organization, its mission, and the donors who support its work. While expenditure responsibility is a requirement for private foundations, the principles behind it reflect broader expectations for all nonprofits engaged in grantmaking.
Treating those principles as a best practice — rather than a legal obligation that only applies to private foundations — helps organizations reduce risk, demonstrate integrity, and respond confidently if questions arise.
How Nonprofit Solutions Law can help
At Nonprofit Solutions Law, we help organizations navigate grantmaking, donor intent, and governance requirements with clarity and confidence. Our team advises nonprofits on when expenditure responsibility applies, how to structure grant oversight, and how to document the use of charitable funds in a way that protects both the organization and its mission.
If your organization is making grants or reassessing its grantmaking practices, we’re here to help you establish a compliant, transparent approach.