Understanding Fundraising Law
Given the increased scrutiny now being directed at nonprofit fundraising campaigns, strict compliance with all applicable federal, state and local laws is more important than ever to prevent even the most well-intentioned effort from turning into a public relations nightmare.
Abiding by the law in the fundraising arena is no simple task. Books have been written on the topic. A brief overview of the complicated legal dimensions of fundraising practices, however, provides a framework for preparing a fundraising endeavor and for determining specific questions that should be directed to legal counsel.
- Federal Tax Rules
- Postal Regulations
- At the State Level
- Local Laws
- Private Fundraising Standards
Finding your way through the maze of federal, state and local fundraising rules can be difficult and confusing. However, it’s not impossible if you concentrate on learning the basics first.
Federal Tax Rules
Record-keeping and reporting. To comply with federal tax rules and maintain tax-exempt status, organizations need to establish some basic record-keeping and reporting procedures and make informative disclosures to their members and donors. To comply with IRS reporting requirements, records should be kept on:
The total amount of contributions, gifts and grants received;
the names and amounts given by large contributors (individuals whose total contributions during the most recent four years are greater than or equal to 2 percent of the organization’s total contributions over that same period); however, because even a small contributor may become a “large” contributor it is a good idea to keep track of all individual contributors to your organization; and,
how the funds raised are spent, including separating program, administration and fundraising expenditures.
A good way to ensure that proper records are kept is for fundraising staff to review the IRS Form 990 Annual Information Return with accounting staff or your outside tax professional.
IRS disclosure and deductibility rules were enacted in the 1960s but not vigorously enforced until recently. To increase compliance, IRS is threatening to examine donor records of organizations that it discovers during audits are failing to make proper disclosures and to subsequently audit the individual tax returns of the organization’s donors for disallowable charitable deductions.
Disclosure statements. IRS has also suggested it will consider assessing penalties
The U.S. Postal Service is enforcing nonprofit postal regulations more vigorously than in the past, perhaps because of the increasing difficulty in getting nonprofit postal subsidies funded by Congress. The Postal Service - authorized to spot-check bulk mail and to impose fines if abuses are uncovered - is concerned primarily with two areas:
fraudulent or misleading direct-mail pieces, and,
misuse of nonprofit postal permits by allowing the permit to be used in cooperative mailings with for-profit firms.
Restrictions on direct mail. For example, in one well-known case the Postal Service took action against a firm raising money for a nonprofit using a sweepstakes mailing. The mailing appeared to be a legal prize notification; however, the prize won by most recipients was only 10 cents. In that case, the Postal Service required that any future sweepstakes appeals include the value of any prizes and the odds of winning.
Some legislators would like to see further restrictions on direct-mail appeals, including requiring the real name and address of the organization or professional fundraiser to be included on the reply envelope and prohibiting fundraising appeals that resemble invoices.
The bulk mail coordinator at your local or regional post office is generally very helpful in answering questions bout the proper use of your nonprofit postal permit. Another source of information is the Alliance of Non-Profit Mailers (www.nonprofitmailers.org).
At the State Level
Registering. Perhaps the most difficult and time-consuming - particularly with respect to a fundraising campaign that appeals to residents in a number of states - is complying with the plethora of state and local fundraising laws. More than 42 states and untold local jurisdictions have enacted special rules for fundraisers. Most of these regulations require organization to register with each state in which they plan to solicit donations before they begin soliciting funds.
For example, in Washington, D.C., organizations are required to register and receive a certificate of registration at least 15 days prior to soliciting contributions. In Maryland, organizations are required to register unless they do not receive contributions in excess of $25,000 in a year and all fundraising activities are performed by volunteers, not paid staff. Most states do not require organizations to register if they are only soliciting donations from their members.
Information frequently required for registration includes:
- Names and addresses of officers, directors, and trustees;
- A recent financial report;
- A description of the organization’s purpose(s); and
- Information on how the funds are intended to be raised, including whether any outside fundraising professionals or consultants will be used.
Disclosures. Following registration, organizations often are required to file an annual report with the state. At the time of solicitation, specific disclosures, such as the fact that information about the charity is on file with the state or that professional fundraisers are being used is often required. States may not require an organization to disclose the amount or percentage of funds rose that will be targeted for fundraising expenses.
To make compliance easier, some 35 jurisdictions (34 states and the District of Columbia) have come together to develop a Unified Registration Statement. Using this one form, available at www.multistatefiling.org , your organization may register in these 35 jurisdictions. Before you get started, however, it’s a good idea to determine the states in which your group will be raising funds from the public and look at the registration and disclosure requirements of those states (see the appendix of the Unified Registration Statement for state-by-state information).
Fundraisers may also be subject to a variety of other state laws, including prohibitions on fraudulent advertising. In some states, a fundraising appeal needs only to be capable of deceiving to violate these laws. More information about these statutes may usually be obtained by contacting the state attorney general’s office.
Many cities and counties also have registration and disclosure statutes. While it is difficult, if not impossible, for an organization to contact every city and county in which it will solicit funds, it is particularly important to do so if you are conducting a door-to-door solicitation, a raffle or a bingo fundraiser, because these types of activities are frequently subject to special local regulations.
Offices regulating fundraising vary depending on the locality; however, local police, finance, tax, licensing, and commerce departments are often responsible for issuing required permits.
Private Fundraising Standards
The Council of Better Business Bureaus Philanthropic Advisory Service has developed governance and fundraising standards for nonprofit organizations. These standards suggest that organizations should expend at least 50 percent of funds raised on activities described in the solicitation. Following these standards, explained in detail at www.give.org, is a good idea for all charitable organizations.