The Biden administration and the Internal Revenue Service are taking aim at donor-advised funds over concerns that the ultrawealthy are abusing the benefits that accrue from contributing to these tax-advantaged charitable vehicles.

The IRS held two days of hearings earlier in May on the $230 billion donor-advised fund industry to investigate claims of abuse and give the public time to comment on its proposal to clamp down.

The proposal introduced in November would broaden the type of accounts that would qualify as donor-advised funds and suggest when a 20% excise tax could be applied to the accounts.

The IRS also wants to expand the definition of donor advisors to include registered investment advisors, who assist clients with the selection and ongoing management of donor-advised fund assets.

The agencies would also impose new penalties on those who abuse the vehicles, including potentially investment advisors and donors themselves, who could get hit with the 20% excise tax.

President George Bush signed the law to create donor-advised funds in 2006. Since then, the assets in these charity funds have grown to nearly $230 billion, surpassing the assets in private foundations.

There are now almost two million fund accounts—nearly double the number that existed five years ago, according to the National Philanthropic Trust, a leading sponsor of the vehicles.

Almost half of donor-advised funds hold less than $50,000, according to a 2024 study from the DAF Research Collaborative. But the Treasury Department and the IRS are particularly concerned that large donors are investing significant sums in the funds, letting the money grow exponentially and then misallocating the monies to charities that somehow benefit the giver.

Executives from a number of charities testified at the IRS hearing that the agency’s proposal could cut down on the amount of donations nonprofits receive at a time when charitable giving is declining, according to a report from the Chronicle of Higher Education.

The push to include investment advisors in the definition of donor advisors, who would then be subject to enforcement, was also criticized, because donor advisors are banned from receiving compensation directly from donor-advised fund accounts, said Kevin Carroll, deputy general counsel at the Securities Industry and Financial Markets Association, in testimony during the hearings.

SIFMA, a trade group that represents the securities industry, is asking the IRS to remove the language about investment advisors from the proposal.

A bipartisan group of 33 lawmakers from the House of Representatives said in an April letter to Treasury Secretary Janet Yellen that the IRS proposal was too broad and warned that it would further dampen donations, especially if investment advisors are categorized as donor advisors.

“By making an investment advisor a donor-advisor, the regulations could severely restrict the role of an investment advisor, and thus lead to donors choosing other vehicles,” the representatives said.

The House members also worried that the IRS’s definition of a donor-advised fund is so broad it would subject public charities and community foundations to a more complicated regulatory regime.

They also took issue with the broader definition of “distribution,” which could subject a variety of payments to an excise tax.

“When the economy is good, donors can make substantial gifts to charity, both in cash and stock, and essentially ‘pre-fund’ years of charitable giving. During challenging economic times, the data show DAFs make grants at record levels and ensure local charities have the requisite resources to maintain their level of services,” the lawmakers said.