Private foundations are required to request advance approval from the IRS prior to beginning a scholarship program. The reason for this is to demonstrate to the IRS that the foundation has a procedure in place that will prevent the possibility of personal benefit by any individual related to the foundation.
Although public charities are not required to obtain pre-approval from the IRS for their scholarship programs, they do still have an obligation to prevent self dealing transactions and should implement best practices into their scholarship programs. To do this, it’s best to have a written scholarship program procedure that spells out the organizations policies relating to giving scholarships and can be followed on a consistent basis. A scholarship program policy should include:
• A statement that scholarships are given on an objective and non-discriminatory basis.
• A description of what the scholarship specifically is to be used for.
• An explanation of the scholarship process (who can apply, what application needs to be completed, who makes the decision, etc.)
• A detailed description of the criteria for selection.
• Who will make the decision (Has a scholarship committee been established? Do they submit recommendations to the Board?) and who cannot make the decision (those who are in a position to personally benefit).
• How the organization will monitor the use of the scholarship funds. For example, if the scholarship is to be used for tuition and books, are receipts required to be submitted prior to payment of the scholarship?
Keep in mind that a similar policy/procedure can also be implemented for other types of grants or assistance.
By Colette Kamps, CPA