Nonprofit Fundraising Mistakes, dos and Dont’s & Its Consequences
Nonprofit fundraising blunders are the number one cause of loss of tax exemption status of exempt organizations. Even If you have been fundraising for decades, and think that you know everything about fundraising, this article will scare the bejesus out of you and for a good reason.
If you’re reading this nonprofit fundraising guide on your phone and have one eye on your Facebook app, you need to sit upright and PAY ATTENTION. This is not some Martha Stewart guide on folding napkins for your fundraising banquet table – this fundraising legal guide is for saving your tax exemption status, preventing IRS audits and saving you from severe tax penalties.
The following article dissects the nonprofit fundraising practices, the good, the bad, the illegal, and more importantly IRS procedures and guidelines used by federal agents to determine whether you broke the laws and limitation involved in fundraising activities. Non-compliance to these laws can result in IRS audit of the nonprofit organization, and consequently revocation of the tax-exempt status of the organization plus penalties. This article is one of many IRS Compliance Rules so be sure to read the rest as well.
what is Nonprofit Fundraising & why you should pay attention
Nonprofit fundraising is an act of soliciting contributions and donations for an exempt organization that would likely not be otherwise donated in the regular course of business. The big issue arises when these fundraising activities jeopardize the very exemptions status of the organization because of silly mistakes and misinformation. The pages of the internet is filled with nonprofit fundraising ideas, fundraising how-to guides and fundraising do’s and don’t, and almost all of them are written by marketers who don’t have a clue what fundraising is and the consequences of their ill advice.
Nonprofit fundraising best practices and related laws
The objectives of this article are to provide guidelines to ensure:
- All fundraising activities conducted by section 501 exempt organizations not eligible to receive tax-deductible donations, are in compliance with the non-deductibility disclosure requirements of IRC §6113 and Notice 88-120, 1988-2 C.B. 454,
- Advertisements and solicitations for “Special Event” fundraising activities are not erroneous or misleading, as to the deductibility of the payments made in connection with the event. Rev. Rul. 67-246, 1967-2 C.B. 104 (amplified by Rev. Proc. 90-12, 1990-1 C.B. 471),
- The organization complies with the disclosure requirements described in IRC §6115, regarding Quid Pro Quo Contributions,
- The organization pays any unrelated business income tax under IRC §511 arising from the nonprofit fundraising activities,
- The organization correctly completes Form 990 returns to accurately reflect fundraising receipts and expenses, and
- Organizations eligible to receive tax-deductible donations, properly handle non-cash contributions received.
Many exempt organizations are commonly in need of additional funds to carry out their exempt purposes, especially in times of economic downturns. For many of these organizations, various methods of fundraisers are employed to draw in those funds that would likely not be otherwise donated in the regular course of business. Unfortunately, regardless of the amount of guidance available from the IRS, some organizations, to whom contributions are deductible, erroneously inform donors that their entire contribution is deductible, when a portion of the contribution is often not deductible.
- Another common issue arises when exempt organizations, to whom contributions are not tax deductible, such as business leagues and labor unions, among others, advise the contributor that the donation is fully deductible, contrary to the law.
- Nonprofits conducting fundraising activities are required to comply with specific fundraising disclosure requirements.
Disclosure of Nondeductible Contributions & Donations
IRC §6113 requires exempt organizations not eligible to receive deductible donations to disclose in all of their fundraising solicitations in a conspicuous and easily recognizable format that contributions or gifts to the organizations are not deductible as charitable contributions for federal income taxes. The following nonprofits, among others, must comply with the requirements:
- Social welfare organizations, civic leagues, homeowners associations – IRC §501(c)(4),
- Labor organizations – IRC §501(c)(5),
- Trade associations, business leagues, chambers of commerce – IRC §501(c)(6),
- Social clubs – IRC §501(c)(7),
- Fraternal organizations – IRC §§501(c)(8) and (10), unless described in IRC §170(c)(4),
- Political organizations – IRC §527(e),
- Communist organizations
- Any other tax-exempt organization not eligible to receive contributions that are tax deductible,
- Any organization that was subject to the disclosure requirement during the five-year period immediately preceding the fundraising solicitation, and
- Any organization that is a successor to an organization that was subject to the disclosure requirement during the five-year period preceding the solicitation.
Foreign organizations also are not qualified to receive charitable contributions, other than:
- A U.S. organization that transfers funds to a charitable foreign organization if the U.S. organization controls the use of the funds or if the foreign organization is only an administrative arm of the U.S. organization, or
- Certain Canadian, Israeli, or Mexican charitable nonprofits, under income tax treaties with those countries.
As outlined in Rev. Proc. 98-19, 1988-1 C.B. 547, certain tax-exempt organizations, other than IRC §501(c)(3) organizations, that pay or incur nondeductible lobbying expenditures are required by IRC §6033(e)(1) to notify their members of a reasonable estimate of the portion of their dues allocable to those expenditures and, thus not deductible. This can also apply with respect to nonprofit fundraising events held for lobbying purposes for such organizations.
IRC §6113 does not apply to fundraising solicitations by nonprofit organizations:
- Described in IRC §170(c),
- That have annual gross receipts that do not exceed $100,000. (The term “gross receipts” is the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses. (Rev. Proc. 83-23, 1983-1 C.B. 687),
Organizations required to file Form 990-N, but not Form 990-EZ, would be among those whose annual gross receipts do not exceed $100,000. Form 990-EZ filers now include nonprofits whose gross receipts exceed $100,000, thus agents should verify the amount of gross receipts when dealing with this exception.
- That solicit only tax exempt nonprofits, or
- That solicit no more than ten persons during the calendar year.
IRC §6113(b)(2)(B) permits the IRS to treat a group of exempt organizations as one organization where appropriate. The purpose is to prevent the use of multiple organizations to circumvent the disclosure requirements by keeping annual gross receipts per entity below the $100,000 limitation.
A fundraising solicitation is any solicitation for a contribution or gift made in written or printed form, by television or radio, or by telephone.
Examples of situations excluded from this disclosure requirement include billing:
- Advertisers in an organization’s publications,
- Members and non-members for food and beverages at a social club,
- Attendees of a conference conducted by an organization,
- Individuals for insurance premiums where the organization sponsors or operates an insurance program,
- Mandatory payments for members of a homeowners association for fire and police protection, and
- Payments for members of a voluntary employees’ beneficiary association described in IRC §501(c)(9).
Nondeductible Contribution Safe Harbor Formats
Notice 88-120, 1988-2 C.B. 454, provides safe harbor guidelines as to acceptable formats for nonprofit fundraising solicitations for non-deductible contributions made in the print media, by telephone, television or radio. If an organization does not comply with the safe harbor guidelines, the examiner must use a facts and circumstances test to determine if the organization has complied with the requirements of IRC §6113.
The safe harbor holds that a fundraising solicitation will be considered to include “an express statement (in a conspicuous and easily recognizable format) that contributions or gifts to such organization are not deductible as charitable contributions for Federal income tax purposes” with respect to print media, telephone, television, and radio.
In the case of a solicitation by mail, leaflet, or advertisement in a newspaper, magazine, or other print medium, (including web pages) the following four requirements are met:
- The solicitation includes whichever of the following statements the organization deems appropriate: “Contributions or gifts to [name of organization] are not deductible as charitable donations for Federal income tax purposes,” “Contributions or gifts to [name of organization] are not tax deductible,” or “Contributions or gifts to [name of organization] are not tax deductible as charitable contributions;”
- The statement is in at least the same size type as the primary message stated in the body of the letter, leaflet, or ad;
- The statement is included on the message side of any card or tear off section that the contributor returns with the contribution; and
- The statement is either the first sentence in a paragraph or itself constitutes a paragraph.
In the case of a solicitation by telephone the following three requirements are met:
- The solicitation includes whichever of the following statements the organization deems appropriate: “Contributions or gifts to [name of organization] are not deductible as charitable contributions for Federal income tax purposes,” “Contributions or gifts to [name of organization] are not tax deductible,” or “Contributions or gifts to [name of organization] are not tax deductible as charitable contributions;”
- The statement is made in close proximity to the request for contributions, during the same telephone call, by the telephone solicitor; and
- Any written confirmation or billing sent to a person pledging to contribute during the telephone solicitation complies with the print medium requirements, stated above.
In the case of a solicitation by television the following two requirements are met:
- The solicitation includes whichever of the following statements the organization deems appropriate: “Contributions or gifts to [name of organization] are not deductible as charitable donations for Federal income tax purposes,” “Contributions or gifts to [name of organization] are not tax deductible,” or “Contributions or gifts to [name of organization] are not tax deductible as charitable contributions;” and
- If the statement is spoken, it is in close proximity to the request for donations; if the statement appears on the television screen, it is in large easily readable type appearing on the screen for at least five seconds.
In the case of a solicitation by radio the following two requirements are met:
- The solicitation includes whichever of the following statements the organization deems appropriate: “donations or gifts to [name of organization] are not deductible as charitable contributions for Federal income tax purposes,” “Contributions or gifts to [name of organization] are not tax deductible,” or “Contributions or gifts to [name of organization] are not tax deductible as charitable contributions;” and
- The statement is made in close proximity to the request for donations during the same radio solicitation announcement.
IRS Fundraising Examination Guidelines: Nondeductible Contributions & Donations
The IRS examiner will do the following to determine how and when to audit your organization for fundraising issues:
- The IRS examiner will determine if the organization is excluded from compliance under IRC §6113. See IRM 184.108.40.206(2) for a list of nonprofits excluded from IRC §6113.
- Reviews the answers to the Form 990 core schedule, Part IV, Lines 14, 17, 18, and Part V, Line 6. If answered yes, then he will review the Schedules F and/or G, to see what information was reported. This information is used to modify the initial interview and internal controls questions as appropriate, and identify questionable items as part of the audit plan.
- Identify all fundraising solicitation activities conducted by organizations not excluded from the disclosure requirements.
- Determines if the particular activity is excluded from the disclosure requirement. See IRM 220.127.116.11(6) for examples.
- Reviews all materials involving solicitation activities, which are not excluded and determine if they have met the disclosure requirements and then considers the applicability of penalties upon identification of areas of noncompliance
The IRS examiners are permitted and instructed to look into printed materials, looking at phone scripts, listening to phone recordings (if made for quality assurance purposes,) watching television recordings, and listening to radio recordings, if maintained by the organization. Copies of such materials can be obtained from the stations that aired the solicitations.
Penalties for Failure to Disclose Non-deductibility of nonprofit fundraising income
- Nonprofits that fail to comply with IRC §6113 are liable under IRC §6710 for a penalty of $1,000 for each day on which such failure occurred not to exceed $10,000 for any calendar year.
- Nonprofits that intentionally disregard the disclosure requirement of IRC §6113 are liable for a penalty of the greater of $1,000 or 50 percent of the aggregate cost of the solicitations that occurred on that day that did not include the required disclosure statement.
The $10,000 penalty limitation does not apply to intentional disregard of IRC §6113. For purposes of the penalty, any failure to meet the requirements of IRC §6113 with respect to a solicitation:
- by television or radio, shall be treated as occurring when the solicitation was telecast or broadcast
- by mail, shall be treated as occurring when the solicitation was mailed,
- not by mail but in written or printed form, shall be treated as occurring when the solicitation was distributed, or
- by telephone, shall be treated as occurring when the solicitation was made.
For web pages, the date that the page was first made available for viewing without the required language would be considered the date of distribution. For versions of earlier pages of web sites, IRS examiners use the internet archive www.archive.org.
IRS examiners are instructed to not assess penalties if the organization can demonstrate the failure is due to reasonable cause. See IRM 18.104.22.168 for a discussion of reasonable cause.
They should also inform taxpayers that they may request:
- A review of the penalty prior to assessment (e.g. deficiency procedures),
- A penalty abatement after it is assessed, and either before or after it is paid (post-assessment review), or
- An abatement and refund after payment (claim for refund).
For further guidance on penalty appeals, see IRM 22.214.171.124.
Erroneous or Misleading Charitable Solicitations from Donors
Revenue Ruling 67-246, 1967-2 C.B. 104, as amplified by Revenue Procedure 90-12, 1990-1 C.B. 471, describes rules on the deductibility of payments to charities for fundraising events and gives examples illustrating how the rules apply. To avoid misleading donors, any charitable organization conducting this type of fundraising is required to:
- Determine the portion of the payment attributable to the purchase of admission or other privilege and the portion solicited as a gift,
- Provide separate amounts in the solicitation, and
- Clearly designate these separate amounts on any ticket, receipt or other evidence of payment furnished to the contributor.
These procedures apply to those situations where organizations hold events where a donative element is expected, such as auctions, galas, benefits, tournaments, and so forth. These procedures do not apply where no donative element is expected, such as a receipt from a museum gift shop for a purchased item.
Examination Procedures: Erroneous or Misleading Charitable Solicitations
The IRS examiner will do the following to determine how and when to audit your organization for erroneos or misleading charitable solicitation by reviewing the answers to the Form 990 core schedule, Part IV. If answered yes, then they’ll review the Schedules F and/or G, to see what information was reported. In addition, they review the responses to Form 990 core schedule Part V, Line 7. This information is used to modify their initial interview and internal controls questions as appropriate, and to identify questionable items for further review.
The IRS examiner also should determine if any fundraising activities conducted were designed to solicit payments intended in part as a gift and in part as the purchase price paid for tickets or other participation in an event. Examples of these types of fundraising events are:
- Charity balls
- Live and silent auctions
- Tournaments (board games, card games, sports)
- Sporting events (baseball, football, etc.)
- Rummage sales
- Car washes
- Bake sales
They are instructed to review the nonprofit organization’s fundraising solicitation materials and activities to determine if the organization clearly designated the amount of the payment attributable to the purchase of admission or other privilege and the portion deductible as a charitable contribution.
Furthermore to inspect tickets or receipts issued to the donor to determine if the organization has clearly designated the separate amounts.
Quid Pro Quo Contributions & Donations
A quid pro quo contribution is a payment made by a donor that is partly a contribution and partly for goods or services provided to the donor by the charity.
Charities that receive a quid pro quo contribution in excess of $75, effective January 1, 1994 (IRC §6115) are required to provide a written disclosure/ acknowledgement statement that:
- Informs a donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money (and the fair market value of property other than money) contributed by the donor over the value of goods or services provided by the organization,
- Provides a donor with a good-faith estimate of the fair market value of the goods or services,
In addition, the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) established IRC §170(f)(8)(A), which requires donors to receive a written acknowledgment from organizations for any single contribution of $250 or more, regardless of whether the contribution is a quid pro quo contribution.
An organization must furnish a disclosure statement in connection with either the solicitation or the receipt of the quid pro quo contribution. The statement must be in writing and must be made in a manner that is likely to come to the attention of the donor.
Example: A disclosure in small print within a larger document might not meet this requirement.
No disclosure statement is required if any of the following are true:
- where the goods or services given to a donor meet the “token exception,” the “membership benefits exception,” or the “intangible religious benefits exception.”
- where there is no donative element involved in a particular transaction, such as in a typical museum gift shop sale
- Payments made for tuition for an education leading to a recognized degree, travel services, or consumer goods are not considered intangible religious benefits.
The organization may use any reasonable methodology in estimating the value of goods and services, provided it applies the methodology in good faith. If the organization fails to apply the methodology in good faith, the organization is treated as not having met the requirements of IRC §6115. See Treasury Regulation §§ 1.170A-1 and 1.6115-1 for more information.
Treasury Regulation §1.6115-1(b) provides that disclosure of a quid pro quo contribution is not required when the goods or services provided have an insubstantial value.
Items have an insubstantial fair market value if the payment occurs in the context of a nonprofit fundraising campaign in which the organization informs donors how much of the payment is a deductible contribution, and one of the following conditions is met, as outlined by Rev. Proc. 90-12, 1990-1 C.B. 471, amplified by Rev. Proc. 92-49, 1992-26 C.B. 987.
- The fair market value of all benefits received by the donor is not more than the lesser of two percent of the payment or $50 whichever is less,
- The donor payment is at least $25 and the only benefits the organization provides the donor in connection with the payment are token items (bookmarks, calendars, key chains, mugs, posters, tee shirts, etc.) bearing the organization’s name or logo. The cost, not fair market value, of all items received by the donor cannot exceed the $5 limit for “low cost articles” under IRC §513(h)(2), or
- The organization mails or distributes free unordered items, without the patron’s request or express consent, along with a request for a charitable contribution and a statement that the patron may retain the item whether or not the patron makes a contribution. The cost of all items provided to a single patron during a calendar year must remain within the limits of a low cost item as described in IRC §512(h)(2).
The $50, $25, and $5 limits listed in IRC §513(h)(2) and above are adjusted each year for inflation. The adjusted amounts applicable for a calendar year are published in a revenue procedure that is usually issued in November or December of the preceding year.
The following membership benefits provided by an organization described in IRC §170(c) are disregarded for purposes of IRC §6115 if it is provided in exchange for an annual payment of $75 or less and consists of annual recurring rights or privileges, such as:
- Free or discounted admissions to the charitable organization’s facilities or events,
- Discounts on purchases from the organization’s gift shop,
- Free or discounted parking,
- Free or discounted admission to member-only events sponsored by an organization, where a per-person cost (not including overhead) is within the token exception limits.
Many nonprofits have donor recognition levels in excess of the $75 annual payment, and require determination by the organizations of the quid-pro-quo contributions. The $75 annual payment is not indexed for inflation.
Intangible Religious Benefits Exception
If a religious organization provides only “intangible religious benefits” to a contributor, the acknowledgment does not need to describe or value those benefits. It can simply state that the organization provided intangible religious benefits to the contributor.
Intangible religious benefits are benefits provided by a tax-exempt organization operated exclusively for religious purposes, and are not usually sold in commercial transactions outside a donative (gift) context. Examples include admission to a religious ceremony and a de minimis tangible benefit, such as wine used in a religious ceremony.
Benefits that are not intangible religious benefits include education leading to a recognized degree, travel services, and consumer goods.
IRS Examination Guidelines: Quid Pro Quo Contributions & Donations in Fundraising
The IRS examiners will review the answers to the Form 990 core schedule and Schedules F and/or G, to see what information was reported. In addition, the examiner will review the responses to Form 990 core schedule Part V, Line 7. This information is used to for interview and internal controls questions as appropriate, and to identify questionable items for further review.
They also review nonprofit fundraising solicitation materials and records to determine if the organization provided any benefits in return for contributions in excess of $75. And determine if the organization provided the disclosure notice with either the solicitation or the receipt of the quid pro quo contribution.
If the organization includes a disclosure statement with a particular solicitation, the organization is not required to include a statement with the associated receipt for the contribution.
- Examiners will not aggregate separate payments of $75 or less made at different times of the year for separate fundraising events.
- Examiners will consider the impact on the deductibility of the contribution to the donor. They should make a referral for taxpayers deducting large non-deductible payments for examination or make a discrepancy adjustment and send referrals to the appropriate SB/SE PSP unit.
- examiners will evaluate the appropriateness of penalties upon identification of areas of noncompliance.
Failure to Disclose Quid Pro Quo Penalties
- (1)Public Law 103-66 added IRC §6714 and is effective for quid pro quo donations made after December 31, 1993. The section provides for a penalty against organizations that do not disclose quid pro quo contributions in excess of $75 as required under IRC §6115(a).
- The penalty is $10 for each failure to provide the required written statement to the payor (donor). The maximum penalty per nonprofit fundraising event or mailing is $5,000.
- Do not assess the penalty if the organization can establish the failure to provide the written statement was due to reasonable cause. For reasonable cause relief guidelines, see IRM 126.96.36.199.
Non-Cash Charitable Contributions & Donations
Treasury Regulation §1.170A-13(b) sets forth that for non-cash contributions to be tax deductible if the donor maintains a receipt from the recipient organization containing:
- The name of the charitable organization,
- The date and location of the charitable contribution, and
- A reasonably detailed description of the property.
- A letter or other written communication from the charitable organization acknowledging receipt of the contribution and containing the information above will serve as a receipt.
Treasury Regulation §§1.170A-13(c) and (f) provide that non-cash donations larger than $5,000, made to an organization eligible to receive tax deductible contributions, are tax deductible if:
- The donee organization supplied the donor with a contemporaneous written acknowledgement of the contribution, containing the information in both IRM 188.8.131.52(1) and IRM 184.108.40.206(2),
- The donor obtained a qualified written appraisal of the property, and
- The donee organization signed the appraisal summary acknowledging receipt of the property and awareness of the subsequent filing requirement, in the event they dispose of the asset within 2 years.
No penalties are imposed on the organization for failure to provide the acknowledgement. However, the donor is penalized, by losing the tax charitable deduction if the donor does not obtain the statement. A donor that loses a deduction may be deterred from making future contributions to that organization. Therefore, charities generally have procedures in place to issue a statement for non-cash contributions.
The organization should sign the appraisal summary located on the Form 8283, Non-Cash Charitable donations, to acknowledge that they received the non-cash contribution on the specified date. The organization is not agreeing or concurring with the donor’s appraised value by signing the acknowledgement, however, they are acknowledging the information reporting requirements on dispositions on donated property.
In accordance with IRC §6050L(a) if a charitable organization sells, exchanges, or otherwise disposes of charitable deduction property within 2 years after its receipt, the organization must file an information return Form 8282, Donee Information Return which contains the following information:
- The name, address, and Taxpayer Identification Number (TIN) of the donor,
- A description of the property,
- The date of the contribution,
- The amount received on the disposition, and
- The date of such disposition.
In accordance with IRC §6050L(c), the organization must provide a copy of Form 8282, Donee Information Return to the donor.
An organization that fails to file Form 8282 when required, may be subject to the IRC §6721 penalties, regarding failure to file a correct information return.
In certain situations, an organization that knowingly prepares an inaccurate substantiation statement and signs the qualified appraisal summary could be subject to the penalties for aiding and abetting an understatement of tax liability. See IRC §6701.
In addition, the donor may be subject to IRC §6662 accuracy penalties if they overstate the value or adjusted basis of donated property.
The penalty is 20% of the underpayment of tax related to the overstatement if:
- The value or adjusted basis claimed on the return is 200% (150% for returns filed after August 17, 2006) or more of the correct amount, and
- The donor underpaid their tax by more than $5,000 because of the overstatement.
The penalty is 40%, rather than 20%, if:
- The value or adjusted basis claimed on the return is 400% (200% for returns filed after August 17, 2006) or more of the correct amount, and
- The donor underpaid their tax by more than $5,000 because of the overstatement.
An appraiser who prepares an incorrect appraisal may have to pay a penalty if:
- The appraiser knows or should have known the appraisal would be used in connection with a return or claim for refund, and
- The appraisal results in the 20% or 40% penalty for a valuation misstatement.
Under IRC §6695A, the penalty imposed on the appraiser is the smaller of:
- The greater of 10% of the underpayment due to the misstatement, or $1,000, or
- 125% of the gross income received for the appraisal.
In addition, any appraiser who falsely or fraudulently overstates the value of property described in a qualified appraisal of a Form 8283 that the appraiser has signed may be subject to a civil penalty for aiding and abetting as understatement of tax liability, and may have his or her appraisal disregarded.
Vehicle Donations as nonprofit fundraising
How a charity operates a car donation program may have tax consequences. The car and vehicle fundraising program can:
- affect a charity’s exempt status; and
- impact the tax-deductibility of the donor’s contribution.
If a charity operates a car donation program in a manner that confers improper benefits on private parties, the charity’s exemption may be adversely affected. In order to be deductible, a donation must be made to a charity that has full control and discretion over the disposition or use of the donation.
In the following three situations, the program should not have an adverse impact on the charity’s tax exempt status. Donors may deduct their contributions (if all other requirements are met).
- If the charity uses donated cars in its charitable program or distributes the cars to needy individuals.
- If the charity sells the donated cars and uses the proceeds to fund its charitable programs.
- If the charity hires a private, for-profit entity as an agent to operate its car donation program. The charity and the for-profit entity must establish an agency relationship that is valid under the applicable state law.
Generally, an agency relationship will be established where the parties agree that the for-profit entity will act on the charity’s behalf and that the for-profit entity’s activities covered by the agreement are subject to the charity’s oversight. Accordingly, the charity should actively monitor program operations and have the right to review all contracts, establish rules of conduct, choose or change program operators, approve of or change all advertising, and examine the program’s books and records.
If the charity grants a for-profit entity the right to use the charity’s name for the purpose of soliciting donations of used cars. The charity receives either a flat fee or a percentage of the proceeds from the sale of the cars to support its charitable programs. The charity has no control over the for-profit entity’s activities.
- The charity has not established an agency relationship with the for-profit entity that is valid under applicable state law; therefore, this program is not the charity’s program.
- Because the for-profit entity is not an agent of the charity, the donors’ contributions are made to the for-profit entity and are not treated as made to the charity.
- A charity cannot license its right to receive tax-deductible contributions. The for-profit entity and the charity must not mislead the public by stating that donations may be deductible (for example, by providing a written acknowledgment that the “contribution” is deductible). Misleading the public in this regard may expose the for-profit entity and the charity to adverse tax consequences.
IRS Examination Guidelines: Non-Cash Charitable Contributions as fundraising
The IRS examiners will review Form 990 Schedules for the descriptions of the non-cash assets donated to the organization.
An exempt organization is required to determine and report the amount of its support on Form 990 and file Form 8282, when applicable. During the initial interview examiners are instructed to ask the following questions, regarding the treatment of non-cash charitable gifts:
- Does the organization have a formal policy regarding non-cash contributions?
- How does the organization value non-cash donated property?
- Do they secure an independent appraisal?
- Does the organization assign a value on the receipt provided to the donor?
- What procedures are in place if the organization determines the value of the property is less than the value claimed by the donor?
- Does the organization maintain copies of appraisal summaries (Form 8283) for non-cash donations?
If the organization maintains copies of Form 8283, review and determine whether:
- The donee organization completed and signed the donee acknowledgement, and
- An official authorized to sign tax or information returns on behalf of the organization signed Form 8283.
IRS examiners determine whether the organization sold, exchanged, transferred, consumed, or otherwise disposed of any non-cash donated property within two years of the date of receipt. They also refer to Announcement 90-25, 1990-8 I.R.B. 25, and the instructions for Form 8282, Donee Information Return, to determine if the charity is required to file Form 8282. If so, they look into whether the organization filed Form 8282, within 125 days after the disposition and provided a copy to the donor.
Then they review copies of Form 8282 which were filed and compare the amount received upon disposition to the appraised value on Form 8283, filed with the donor’s return, via RTVUE, or BRTVU and look for large, unusual, or questionable variances.
Large variances could indicate that the appraised value was excessive, thus the deduction taken by the donor was inaccurate. If the Form 8282 and Form 8283 reflect a significant discrepancy, they consider making a discrepancy adjustment, or prepare a referral Form 5666 and submit it to EO Classification who will forward it to the appropriate operating division.
Finally they assess penalties under IRC section 6723 when the organization has failed to file Form 8282, as required.
Internet & Online nonprofit fundraising
The Internet presents many new opportunities for tax-exempt nonprofits to raise revenues to finance their operations. Generally, web site or e-mail solicitations should comply with the same rules that apply to other solicitations.
Many nonprofits will have web pages on their websites set to take a donation, through Pay Pal or other online electronic funds transfer methods. Any such pages should contain the required disclosures as to deductibility. Receipts generated by electronic donations should likewise contain disclosures
Numerous for-profit (and non-profit) websites have been set up to provide ideas for fundraising activities. Many, but not all of these sites charge fees for directions as to how to conduct the activities, or are tied into selling merchandise as fund-raisers (such as magazine, and candy sales)
Examination Guidelines: Internet Fundraising
Beside reviewing Form 990 Schedule G, IRS examiners are instructed to visit the organization’s web site to identify any fundraising activities the organization conducts on the Internet.
IRS examiners determine if the organization acknowledges its sponsors/donors on its web site by displaying names, logos, or products, or creating links to the sponsor’s web site. They look for sale of advertisement, which may be taxable as unrelated business income.
They also determine the taxability of any merchandise sales on the Internet using the same principles that apply to the sale of merchandise in an organization’s gift shop or other location. Based on the facts and circumstances, the income could be unrelated business income regardless of where the organization sells the items.
Most importantly, they verify that any organization subject to the requirements of IRC §6113 includes one of the statements listed in Notice 88-120, 1988-2 C.B. 454, in any web-based fundraising solicitation. To ensure the viewer has an opportunity to see the statement before making a contribution, the statement must be:
- In the same type size as the primary message,
- Readily visible against the background of the page,
- On the same page as, and in close proximity to, the actual request for funds
- Either the first sentence in a paragraph or the statement itself constitutes a paragraph,
- Presented without the viewer having to follow a link to see the statement, and
- In plain view before the viewer clicks on the “submit” , “transmit” , “accept” or other button that transmits their donation information to the soliciting organization.
The penalty provisions apply to web page solicitations. IRC §6710(d)(3) provides that written or printed solicitations (other than mail) shall be treated as occurring when the solicitation was distributed. Generally, the IRS would consider a web page to be distributed when it is uploaded to a server and becomes available to the public.
Using Professional Fundraisers and its problems
The use of professional fundraisers is an area of legitimate concern in examinations or exempt organizations. Some nonprofit fundraising arrangements unduly benefit the professional fundraiser, who may or may not be an “insider” with respect to the organization seeking exemption, while providing minimal amounts of income for actual charitable uses. However, not all arrangements with professional fundraisers are suspect. Many legitimate fundraisers provide useful services to exempt nonprofits in helping them organize and conduct nonprofit fundraising campaigns. Professional fundraisers offer expertise and efficiency to both newly created nonprofit organizations whose officers are unfamiliar with resources and methods for obtaining funds, and to established nonprofits that wish to expand their support base.
In examining an exempt organization, the IRS examiner will try to get all the facts. Before advising an organization that its prior or current use of a professional fundraiser has an adverse effect on its qualifications for exemption, they are instructed to requests for additional information.
Examination Guidelines: Professional Fundraisers
When dealing with the issue of a professional fundraiser and a public charity, the examiner should determine whether the fundraiser is an insider with respect to the organization. Asserting inurement against a fundraiser requires following the procedures under IRC §4958. The Seventh Circuit in United Cancer Council v. Commissioner, 165 F.3rd 1173 (7th Cir. 1999), held against the IRS, and remanded the case to the Tax Court for a ruling on the issue of private benefit.
In 1984, United Cancer Council (UCC) had entered into a five year mail solicitation fundraising contract with Watson & Hughey (W&H). UCC had no risk under the contract if the fundraising contract went poorly, and enjoyed income if the fundraising was successful. UCC paid very high fees for the creation of the mailing lists, which the Tax Court had found were controlled by W&H during the term of the contract. Most of the expenses resulting from generation of the mailing list were paid to W&H or one of its affiliates. Funds generated by the mail solicitations were deposited into an escrow account and disbursed only on instruction from W&H. UCC was dependent on these funds to avoid insolvency. Even though the contract was amended from time to time, W&H did not, during the term of the contract, release control of the mailing lists nor of the escrowed funds. Upon expiration, the contract was not renewed by UCC.
The Seventh Circuit reversed the Tax Court’s findings that W&H was a UCC insider and its findings that the net earnings of UCC had inured to the benefit of W&H. However, the Seventh Circuit clarified that upon remand, the Tax Court may consider whether UCC had operated to confer private benefit on W&H by the board’s violation, if any, of its corporate duty of care involving the dissipation of the charity’s assets. (The Court clarified that this type of “private benefit” is different from the usual private benefit case “where charity had dual public and private goals.” )
The IRS examiner during the pre-audit phase of the examination, reviews the Form 990 core schedule Part IV, Line 17. If answered yes, the organization is required to attach Schedule G.
If professional fundraisers have been reported on the Form 990 Schedule G, they review the contracts for each fundraiser, and determine whether any contracts have been renewed or revised.
For nonprofits with inurement/private benefit clauses under the Code, the auditor prepares cases for revocation and/or IRC §4958 should inurement be identified.
Unrelated Business Income Tax and nonprofit Fundraising
The fundraising activity is not a taxable unrelated trade or business if it meets any of the following exceptions:
- Not regularly carried on, IRC §512(a)(1)
- Sale of merchandise, “substantially all” of which was donated, IRC §513(a)(3)
- “Substantially all” of the work is done by uncompensated workers, IRC §513(a)(1)
- Items sold are “low cost articles,” IRC §513(h)(2)
- Payments received are “qualified sponsorship payments,” IRC §513(i)
Examination Guidelines: Unrelated Business Income in Fundraising
The IRS Analyzes fundraising activities to determine whether such income is subject to unrelated business income tax.
Example: A monthly bake sale selling donated merchandise acquires 20% of the items for sale by purchasing them from bakeries, thus failing the IRC §513(a)(3) exclusion for donated merchandise.
Example: A car wash held weekly for booster club uses supplies provided gratis by a gas station, but the students providing the labor are paid in cash for their time out of the proceeds. The organization would fail to meet the donated labor exclusion.
Income from conducting bingo and other gambling activities open to the general public may be subject to the unrelated business income tax imposed by IRC §511(a). See IRM 4.76.50.
The examiner should determine whether the organization received any donated real property subject to debt financing. If subject to IRC §514, compute the tax liability, if any.
For calculating the tax liability, they follow the guidelines in IRM 7.27.
Proper Reporting of Nonprofit Fundraising Activities on Form 990
All exempt organization must provide copies of their Form 990, when requested in person or in writing. Forms 990, 990-EZ, 990-PF, 990-BL, 1023, 1024 and (in the case of §501(d) organizations) 1065 are all available for public inspection under IRC §6104(d).
Pension Protection Act of 2006, effective August 17, 2006, further requires exempt nonprofit organizations to provide copies of the Form 990-T when requested n person or in writing.
Potential donors may inspect Form 990 Returns and review the fundraising and operations costs to identify organizations to support. Nonprofit organizations reporting low fundraising and operating costs could be perceived more favorably since these costs generally do not directly promote an organization’s mission.
For purposes of Form 990 expense reporting, “fundraising” activities relate to soliciting and receiving contributions. Special events and activities conducted primarily to solicit and receive donations and not to sell goods or services at retail are “special fundraising activities” , regardless of whether a profit is made.
All Forms 990 have required nonprofits reporting fundraising activities to separately determine and report the amounts of fundraising contributions and the revenues generated by the events. Additional information is requested of nonprofit organizations conducting fundraising activities through form 990:
- Professional nonprofit fundraising and total fundraising expenses are reported on Form 990 Part I, Line 16.
- All nonprofits are required to indicate whether they have filed Form 990 Schedule B, Schedule of Contributors, on the Form 990, Part IV, Line 2.
- Foreign nonprofit fundraising activities are identified in answering Form 990, Part IV, Line 14.
- Organizations with more than $15,000 in either fundraising contributions, event revenues, or professional fundraising expenses answer yes to Form 990, Part IV, Lines 17 or 18, and complete Form 990 Schedule G.
- Any organization receiving more than $25,000 in non-cash donations now completes Form 990, Schedule M, and answers yes to Form 990, Part IV, Line 29.
- Contributions of art, historical treasures or similar assets also require completion of Form 990, Schedule M, and a positive answer to Form 990, Part IV, Line 30.
- Non-deductible cash solicitations are questioned at Form 990, Part V, Line 6, while deductible cash solicitations are covered at Form 990, Part V, Line 7.
Nonprofit organizations that do not meet the filing requirement thresholds for the Form 990 are required to file Form 990-EZ, or if below the Form 990-EZ threshold, the Form 990-N. While the Form 990-EZ still requests the break down of fundraising contributions and event revenues from the special events gross receipts, the additional schedules are not required of Form 990-EZ filers.
Form 990-EZ filers that are tax-exempt nonprofits recognized as publicly supported, as described in IRC §§509(a)(1) or 509(a)(2), are required to correctly allocate the gross receipts from “special events” into revenue and contributions from the public. This distinction is important in determining the private foundation status of an IRC §501(c)(3) organization.
When an organization receives more than retail value from the sale of goods and services, as in a Quid Pro Quo contribution, the organization should report both a contribution and revenue from the activity. The organization should report the retail value of the item as revenue from the activity and the additional amount received as a contribution (Public Support).
Likewise, the organization should determine the costs that directly relate to the sale (Quid Pro Quo) and report them as direct expenses of the special activity. The organization should report the remaining expense as “fundraising” expenses.
The organization should report the revenue generated from items which have insubstantial value and are not subject to the Quid Pro Quo disclosure requirements, as a contribution and all related costs as fundraising expenses.
Examination Guidelines: Proper Reporting of fundraising Activities on Form 990
For Form 990, IRS examiners review Part IV, Checklist of Required Schedules, Part V, Statements Regarding Other IRS Filings and Tax Compliance, Part VIII, Statement of Revenues, and Part IX, Statement of Functional Expenses of the core schedule, as well as Schedules G and M, if filed for information concerning the fundraising activities.
They also review the Statement of Functional Expenses (Forms 990 and 990-EZ) and verify that the organization has properly allocated expenses between program service, fundraising, and management /general.
The IRS determines whether the organization engaged in any special fundraising activities and, if so, properly reported income and expenses on Form 990. Omitting material information on a Form 990 may subject the organization to the penalties imposed by IRC §6652(c)(1)(A)(ii)
Examiners will review nonprofit fundraising programs to determine if the organization provides any benefits to contributors that would affect the deductibility of the contribution. They also:
- Identify the officials responsible for soliciting and accounting for gifts. Obtain a description of their duties and responsibilities.
- Interview the employees, who plan, administer, perform, and carry out the organization’s fundraising activities.
- Review minutes of the governing board as well as the fundraising committees (budget and finance, or development) to identify any conditional contributions that may have questionable terms, since some nonprofits require that the governing board formally accept large contributions, especially conditional or earmarked donations.
Example: A gift to construct a building conditioned on the use of a certain architect or hiring a specific construction firm could suggest a private benefit that could jeopardize the IRC §170 deduction and the organization’s exempt status if the donor and beneficiary of the condition have less than an arms-length relationship.
- Review internal reports related to gifts (Alphabetical lists of contributors, lists of donors, lists of restricted gifts, lists of in-kind gifts, etc.) to determine any contributions which may not be at arm’s length.
- Review correspondence files relating to fund solicitations and any agreements concerning gifts received to identify restricted, earmarked, or conditional donations. Analyze the terms or conditions of the contributions to identify private benefit, inurement, or indications of non-exempt activities.
- If it is determined that another IRC §501(c)(3) organization conducts the fundraising activities the examiner should inspect the fundraising organization’s Form 990 and determine if an examination is warranted.
- Any solicitations made on behalf of the organization by an outside professional fund-raiser must meet the same requirements that a solicitation conducted directly by the organization would. In addition, nonprofit organizations must keep samples of nonprofit fundraising materials used by any outside professional fund-raiser who raises funds on their behalf.
- Review contracts and agreements with professional fund-raisers to identify fees charged as a percentage of funds raised or for excessive fees. These could be indications of private benefit or inurement.
- If indications of fraud are discovered during the examination, refer to fraud procedures in Internal Revenue Manuals 4.75.21, 25.1.1, 25.1.2, and 25.1.9.
- Nonprofit Articles of Incorporation,
- Nonprofit Bylaws,
- Nonprofit Conflict of Interest Policy,
- Conflict of Interest Policy Acknowledgment,
- Form 1023 Attachment with all the answers,
- Form 1023 Expedite Letter template,
- and Donor Contribution Form
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