Understanding Fundraising Law: 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 against organizations for aiding donors in taking improper deductions - that is, by suggesting a donation is tax-deductible when it is not.
IRS disclosure rules require organizations to inform prospective donors about the extent to which their contributions are legally tax deductible. Disclosures should be made on membership applications, direct-mail appeals, tickets to and flyers promoting fundraising events, and so forth.
Once-common statements, such as “contributions are deductible to the extent permissible by law,” are no longer sufficient. Instead, disclosure statements should indicate the specific fair market value - the cost to purchase the item or service on the open market, not the cost to the nonprofit of providing the item or service to the donor - of benefits received and the exact amount of the contribution that is deductible.
For example, if an association’s foundation holds a dinner-dance with a fair market value of $45 but charges $100 per ticket, the foundation should disclose that $55 of the ticket price is a deductible charitable contribution.
Additional information on IRS disclosure and deductibility rules can be found in IRS Publication 1391 available at www.irs.gov
Tracking changes. It’s also a good idea for at least one staff member to stay abreast of major fundraising issues. In recent years, for example, IRS has begun taking a closer look at travel programs, corporate sponsorship programs and the use of websites for fundraising.
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Fundraising: Understanding Fundraising Law