Why Individual Grants Are Different
Most private foundation grantmaking is straightforward: you write a check to a 501(c)(3) public charity, document the purpose, and report it on your 990-PF. Grants to individuals — scholarships, fellowships, research grants, prizes — work differently.
Under IRC §4945, any grant a private foundation makes to an individual is automatically a "taxable expenditure" unless the foundation has obtained advance IRS approval of its grant procedures. The penalty for getting this wrong is a 20% excise tax on the foundation and a 5% personal tax on any manager who approved the grant. If not corrected, those penalties escalate to 100% and 50%, respectively. (For the full picture on foundation excise taxes, see our excise tax guide.)
This isn't a technicality. It's one of the more punitive rules in the foundation excise tax framework, and the IRS enforces it. Foundations that award scholarships without approved procedures — even for genuinely charitable purposes — face real penalties.
The good news: the approval process is manageable if you know what the IRS is looking for. Here's how to set it up.
What Counts as a "Grant to an Individual"
Before diving into procedures, it's worth clarifying what triggers the §4945 individual grant rules. The IRS defines this broadly. It includes:
Scholarships and fellowships for study at educational institutions. This is the most common type — funding tuition, books, and living expenses for students at accredited schools.
Research grants to individuals conducting specific projects — if you're funding a researcher directly, not through their university, this is an individual grant.
Prizes and awards given in recognition of achievement, if the recipient is selected by the foundation. Prizes that the recipient doesn't apply for and has no obligation to perform future services for may qualify for an exception, but it's narrow and fact-specific.
Emergency hardship grants to individuals in need — disaster relief, medical assistance, and similar direct-to-individual aid.
What doesn't trigger these rules: grants to organizations (even if the organization uses the funds to benefit specific individuals), employee compensation, and grants qualifying under the §4945(g) awards exception.
The Three Requirements for IRS Approval
The IRS evaluates your scholarship program against three criteria. Your submission needs to demonstrate all three convincingly.
1. Objective Selection Criteria
Your program must select recipients based on criteria that are objective, nondiscriminatory, and related to the grant's charitable purpose. The IRS wants to see that recipients are chosen on merit or need — not on the grantor's personal preferences.
Strong criteria include academic achievement (GPA, test scores), financial need (FAFSA data, family income thresholds), field of study aligned with the foundation's mission, geographic residency, community involvement, and membership in a broadly defined charitable class (first-generation college students, students from under-resourced schools).
The IRS will push back on anything that limits eligibility to a class so small that the foundation effectively controls who gets selected. If your "scholarship program" is really a mechanism to fund one specific person, the IRS will see through it.
The employer-related test. If your foundation was created by or is associated with a company, and the scholarship is limited to employees or their children, additional rules apply under IRC §4945(d)(3) and Revenue Procedure 76-47. The eligible class must be broad enough (generally, at least 25% of eligible employees' children must be able to receive grants in any year), the selection committee must be independent of the company, and the grants cannot be conditioned on continued employment. These "company scholarship" programs are common and approvable but require careful structuring.
2. An Independent Selection Process
The IRS doesn't require a specific selection method, but it needs to see that the process is genuinely independent and not a rubber stamp for the foundation's donors or officers.
Best practices: use a committee of at least three members, ensure a majority have no relationship to the foundation's substantial contributors or disqualified persons, document how members are chosen, establish a written conflict of interest policy for the committee, and keep applicant reviews blind where practical.
The committee doesn't need to be entirely outsiders, but the IRS looks unfavorably on committees dominated by the foundation's creators, donors, or their family members. If the founder and their spouse are two of three members, the IRS will likely request changes.
3. Adequate Supervision and Reporting
The IRS needs to see that the foundation will monitor how scholarship funds are used — not just write checks and forget about them. This is the ongoing compliance piece that many foundations underestimate.
Your supervision procedures should cover how funds are disbursed (directly to the institution is strongly preferred), what reports you require from recipients (transcripts, enrollment verification), how often you collect them (at least annually), what happens if a recipient fails to maintain eligibility, how you handle unused funds, and record retention (at least seven years).
Direct payment to institutions. Paying the recipient's school directly simplifies supervision significantly — the school confirms enrollment and progress, funds go to educational expenses, and the foundation has a clear paper trail. Paying students directly creates additional monitoring obligations and more compliance risk.
Submitting Your Procedures to the IRS
There's no special form for this. You submit a written request to the IRS describing your program and procedures, and the IRS issues a determination letter.
What to Include in Your Submission
Your submission should contain a cover letter identifying the foundation (name, EIN, address) and requesting advance approval under IRC §4945(g), a description of the scholarship program's charitable purpose, the eligibility criteria (be specific — "students with financial need" is too vague; "students from families with AGI below $75,000 enrolled in accredited four-year institutions" is what the IRS wants), a description of the selection process and conflict of interest procedures, supervision procedures (disbursement method, reporting requirements, triggers for suspension), sample application and grant agreement (optional but strengthening), and the anticipated number and size of annual awards.
Where to Submit
Mail the request to the IRS Exempt Organizations Determinations office. As of 2026, the mailing address is:
Internal Revenue Service
Attn: EO Determinations
P.O. Box 12192
Covington, KY 41012-0192
Include a copy of the foundation's determination letter (showing 501(c)(3) status) and the most recent Form 990-PF.
Timeline
Expect 3 to 6 months for a response. The IRS may request additional information or modifications to your procedures. Don't plan on awarding scholarships until you have the approval letter in hand — retroactive approval isn't available, and grants made before approval are taxable expenditures.
Ongoing Compliance After Approval
Getting IRS approval is the starting gate, not the finish line. The foundation has ongoing obligations for every scholarship it awards.
Annual Reporting on Form 990-PF
Report individual grants on Part XV of Form 990-PF. For each grant, you'll list the recipient's name (or "withheld" if you have a valid reason), the amount, the purpose, and the relationship to any disqualified person. You'll also need to confirm that the grants were made under IRS-approved procedures and that you obtained the required reports from recipients.
Grantee Reporting and Monitoring
Collect whatever reports your approved procedures specify — typically annual transcripts and enrollment verification. Document your review of these reports. If a grantee stops meeting the requirements (drops out, falls below minimum GPA, fails to submit reports), your procedures should specify what happens next: suspension of further payments, recovery of unused funds, or reallocation.
Keep a file for each grantee that includes the application, the committee's evaluation, the award letter, the grant agreement, disbursement records, all reports received, and any correspondence about changes in status.
When You Need to Go Back to the IRS
If you materially change your program — new eligibility criteria, a different selection process, adding a new grant category (say, expanding from scholarships to research grants) — submit the revised procedures for a new determination. Minor administrative changes (adjusting the application deadline, increasing the award amount) don't require resubmission.
If you're unsure whether a change is material, err on the side of resubmitting. The cost of a new determination request is minimal compared to the risk of operating under procedures the IRS hasn't approved.
Common Mistakes to Avoid
Awarding grants before IRS approval arrives. This is the most consequential mistake. Every grant made before the IRS issues a favorable determination is a taxable expenditure, regardless of how well-designed your program is. There's no grace period and no retroactive approval.
Designing criteria so narrow they effectively pre-select recipients. A scholarship for "female students named Sarah who graduated from Jefferson High School in 2024 and are studying marine biology at UC San Diego" isn't a scholarship program — it's a directed gift with extra steps. The IRS will deny approval if the eligible class is functionally one or two people.
Neglecting supervision after the first year. Many foundations set up strong procedures, award scholarships diligently in year one, and then stop collecting reports or documenting compliance. The IRS can audit any year, and "we used to do that" isn't a defense.
Paying scholarship funds directly to students without adequate oversight. Direct payments to students are harder to monitor and create more risk. If the student uses the money for non-educational expenses, the foundation has a compliance problem. Whenever possible, pay the institution directly.
Failing to address conflicts of interest. If a committee member's child applies, and the committee member participates in the review, you have a problem — even if the child was the most qualified applicant. Your procedures need a clear recusal mechanism, and you need to follow it.
What This Looks Like in Practice
A family foundation with $5 million in assets wants to fund college scholarships for students from its hometown. Here's what a solid program structure looks like:
The foundation creates a three-person scholarship committee: one community member with education experience, one local school counselor, and one foundation board member (who recuses from any application involving a known connection). Eligibility is defined as graduating seniors from the county's public high schools, with a minimum 2.5 GPA, who demonstrate financial need based on FAFSA Expected Family Contribution. The foundation awards three to five scholarships annually, ranging from $2,500 to $10,000, renewable for up to four years contingent on maintaining full-time enrollment and a 2.0 GPA. Funds are disbursed directly to the recipient's accredited institution.
The foundation submits these procedures to the IRS, receives approval, and begins accepting applications. Each year, the committee reviews applications, makes selections, sends award letters with grant agreements, and pays institutions directly. Recipients submit transcripts annually. The foundation documents everything and reports on Form 990-PF.
That's it. Not simple, but entirely manageable — and it counts toward the foundation's 5% distribution requirement.
When to Get Help
You don't need an attorney to conceptualize your scholarship program or draft initial eligibility criteria. Those are operational decisions about your foundation's mission and priorities.
You likely do need professional help for drafting the formal procedures and IRS submission — the language matters, and the IRS is looking for specific elements. You'll also want guidance if your program has any complexity beyond a basic scholarship: employer-related programs, grants for research or travel, programs that serve a very narrow geographic or demographic group, or situations where disqualified persons might be eligible.
If you're running a family foundation and want to set up a scholarship program, a conversation with an advisor who understands both the regulatory framework and the practical operations can save months of back-and-forth with the IRS. We help foundations design programs that the IRS will approve the first time, and we set up the ongoing compliance systems so the program runs smoothly year after year.
If you're not sure whether an individual grant program is right for your foundation — or whether your grantmaking goals might be better served through grants to organizations — book a free call and we'll help you think through the options.