Audit Technique Guide For Fundrasising Activities
Audit Technique Guide – Fundraising ActivitiesIntroductionThis guide addresses examining tax exempt organization fundraising and provides: Background information Audit guidelines Audit techniques Audit proceduresThis guide is not all-inclusive and doesn’t intend to limit agents to identifying issuesor using techniques not listed in this guide.For information on fundraising issues involving political organizations, see the AuditTechnique Guide for Political Organizations. For information on fundraising issuesinvolving gaming activities, see the Audit Technique Guide for OrganizationsConducting Gaming Activities.This manual is organized into five sections: Background information Activities (professional fundraisers, fundraising events, internet fundraising) Records (solicitations, disclosures, cash contributions, non-cash contributions) Reporting (Form 990-EZ, Form 990: Core Return, Schedule G, Schedule M,Form 990-PF, Form 990-T) Audit procedures (pre-audit, field/OCEP, penalty considerations, case closing)BackgroundMost, if not all, tax exempt organizations need money. Many exempt purposes canonly be achieved via the application of money. Thus, large numbers oforganizations devote significant resources to acquiring money. These organizationsuse various methods to obtain funds, ranging from selling a product or service,conducting a fundraising event, to just asking for money.Traditional methods of obtaining funds include soliciting donors via the mail, phonecalls, newspapers, radio, television, and now via the Internet. Organizations havebecome creative over the years, conducting activities and events, such as the salesof foodstuffs, car washes, raffles, casino nights, auctions, and pledge drives,evolving towards more sophisticated ways to fundraise, such as targetingsolicitations, using patronage levels, crowd-funding, and tax planning, such asconservation easements, lending arrangements, and charitable gift annuities.Fundraising activities generate tax issue concerns, such as: Is the contribution deductible? How much of the contribution is deductible? What is the value of the contribution? Is the donation a valid contribution? Does the fundraising activity trigger a tax liability?1
If tax is owed, how do I compute the tax?How does the information get reported?See these helpful publications for taxpayers who are both donors and donees: Pub. 1771, Charitable Contributions - Substantiation and DisclosureRequirements Pub. 526, Charitable Contributions Pub. 561, Determining the Value of Donated Property Pub. 4302, A Charity’s Guide to Vehicle Donations Pub. 4303, A Donor’s Guide to Vehicle DonationsProfessional FundraisersProfessional fundraisers are people and companies that tax exempt entities hire toraise funds. Some fundraisers work as employees for the organizations for whichthey raise funds. Other fundraisers work as consultants, many independentlycontracted for specific fundraising activities.Fundraising employees typically receive salaries; however, some may receive apercentage of the gross receipts. In either situation, consider reviewing thecontracts to determine if excess benefit transactions exist. Be aware that mostorganizations will lump the fundraising employee(s)’ compensation with the rest ofthe organization’s staff when they report expenses on the Forms 990-EZ, 990-PF,and 990. Therefore, you may not necessarily find a separate expense listing for thefundraising employee.Those working on behalf of organizations as external consultants or fundraisersmust file reports with the various state charity regulators. Many of these entitiesand/or individuals receive a percentage of the proceeds. Some receive apercentage in addition to a set base amount of compensation. As thesearrangements, can lead to abuse, consider reviewing all contracts with fundraisingfirms to determine the extent of private benefits. For a list of state charity regulators,see the www.nasconet.org website.If an organization employs/contracts a professional fundraiser’s services, considerreviewing any reports filed with the state(s). Depending on the type of organization,you may need to also check the Federal Election Commission, state lobbyist andpolitical campaign disclosure websites, as well as the www.irs.gov site for politicaland legislative fundraising records. See Audit Technique Guide for IRC Section 527Political Organizations.Fundraising EventsOn any given day, you may encounter a fundraising activity. Whether purchasing anewspaper on a city corner, stopping to buy food at a table set up outside agrocery store, or dropping your spare change into a container at a cash register,chances are you’ve taken part in a fundraising transaction.2
Fundraising activities are undertaken to induce potential donors to contributemoney, securities, services, materials, facilities, other assets, or time. Fundraisingevents include: dinners and dances door-to-door sales of merchandise concerts carnivals sports events auctions casino nights (in which participants can play casino-style games but the onlyprizes or auction items given are non-cash items that were donated to theorganization) similar events not regularly carried on conducted for the primary purpose ofraising funds.Activities to support these events can include: Publicizing an event. Maintaining donor mailing lists. Preparing and distributing fundraising manuals, instructions, and othermaterials. Professional fundraising services. Conducting other activities involved with soliciting contributions from individuals,foundations, governments, and others.Fundraising events don’t include: The conduct of a trade or business that is regularly carried on Activities substantially related to the accomplishment of the organization’sexempt purposes (other than by raising funds) Solicitation campaigns that generate only contributions, which may involvegoods or services from the organization of only nominal or token value. (See“Solicitations” below.) Sweepstakes, lotteries, or raffles in which the names of contributors or otherrespondents are entered in a drawing for prizes of only nominal value. GamingOrganizations are responsible for recording all fundraising transactions andreporting on their activities. The greater the amount of gross receipts, the greaterthe reporting requirements. The level of detail in the record keeping is up to theindividual organization; however, it must keep certain records to satisfy variousreporting needs. Organizations that don’t keep appropriate records may be subjectto inadequate records notices or revocation. See IRM 4.75.13, Issue Development.Internet FundraisingWith the advent of high-speed internet access and secure communications(indicated by https:// at the start of a web address), using the internet to raise fundsis more practical than ever before. Those wishing to donate need only have a creditcard, debit card, or checking account information on hand to make a donation in3
minutes. Gone is the need for employees or volunteers to take down a donor’sinformation.Numerous for-profit companies provide services for organizations that want to setup an online fundraising presence. These companies design the websites, processthe transactions, and offer back end processing. Organizations can also chooseother fundraising methods, such as online auctions, crowd funding, and emails tocurrent donors.Online fundraising can capture additional information in easily accessible formatsthat previously took voluminous data entries to get. If an organization obtains fundsvia online methods, the organization will often have access to databases of donorrecords. Organizations can now generate lists of donors, regardless of the amountof the donation, in minutes. This information can help you analyze the Form 990Schedule B compliance and identify disqualified persons.Thinking points for pre-audit planning and audit include: Ask about the software used to track donations. Look at the types of records kept using such software. Review the donor lists kept for Form 990 Schedule B purposes. Check the organization’s website. Examine contracts with internet service vendors. Determine the methods of payment. Verify the filing of Forms 1099-K, Payment Card and Third Party NetworkTransaction. Obtain transactional information from the vendors.SolicitationsOne of the most common methods of fundraising is the old fashioned solicitation.Many organizations won’t receive funds unless they ask potential donors tocontribute. Normally, we don’t regulate the method or content of solicitations. Thereare a few exceptions: All tax-exempt organizations including political organizations are subject tospecific disclosure rules under IRC Section 6711. (See below.) Generally, all tax-exempt organizations ineligible to receive tax deductiblecharitable contributions (including political organizations) must inform donors ofthe non-deductibility of contributions under IRC Section 6113.If any exempt organization or political organization offers to sell, or solicits moneyfor, specific information or a routine service that is available free from the federalgovernment, the organization must make an express statement at the time ofsolicitation about the free service. An organization that intentionally disregards thisrequirement is subject to a penalty. (IRC Section 6711)Many states have laws regulating the solicitation of funds for charitable purposes.These laws often require registering with a state agency before soliciting the state’sresidents for contributions. Many states provide exemptions from registering certaincategories of organizations. In addition, organizations may be required to file4
periodic financial reports. State laws may impose additional requirements onfundraising activity involving paid solicitors and fundraising counsel.DisclosuresDonors of charitable contributions are subject to recordkeeping and substantiationrules. An organization that doesn’t acknowledge a contribution doesn’t incur apenalty. However, donors may need a written acknowledgment from the charity inorder to take a charitable deduction on their tax return.For any contribution of money, a donor must have a bank record or writtencommunication from a charity in hand before claiming a charitable contribution onan income tax return. If a donor gives 250 or more in a contribution, the donormust have a written acknowledgment from the organization to support thededuction. IRC Section 170(f)(8) and IRC Section 170(f)(17). The writtenacknowledgment from the donee must show: The name of the donee organization The amount of the contribution For non-cash contributions, a description of the donated property (not thevalue) and must also contain any one of the following:o A statement that no goods or services were provided in return for thecontribution.o A description and good faith estimate of the value of goods andservices provided in return for the contribution.o A statement that goods or services provided in return for thecontribution were intangible religious benefits.With respect to “quid pro quo contributions,” IRC Section 170(c) organizations ingeneral must provide a written disclosure statement to a donor who makes apayment exceeding 75. (IRC Section 6115) Failure to make a quid pro quo writtendisclosure (whether in advance or as an acknowledgment) can result in a penaltyunder IRC Section 6714.Nondeductible ContributionsOrganizations ineligible to receive deductible contributions must disclose in all oftheir fundraising solicitations that gifts to them aren’t tax deductible. (IRC Section6113) The following organizations, among others, must comply with therequirements: Social welfare organizations, civic leagues, homeowners associations (IRCSection 501(c)(4)) Labor organizations (IRC Section 501(c)(5)) Trade associations, business leagues, chambers of commerce (IRC Section501(c)(6)) Social clubs (IRC Section 501(c)(7)) Fraternal organizations (IRC Section s501(c)(8) and IRC 501(c)(10)), unlessdescribed in IRC Section 170(c)(4) Political organizations (IRC Section 527(e)) Any other tax-exempt organization not eligible to receive contributions that aretax deductible5
Any organization that was subject to the disclosure requirement during the fiveyear period immediately preceding the fundraising solicitation Any organization that is a successor to an organization that was subject to thedisclosure requirement during the five-year period preceding the solicitation.Foreign organizations also aren’t qualified to receive charitable contributions, otherthan: A U.S. organization that transfers funds to a charitable foreign organization ifthe U.S. organization controls the use of the funds or if the foreign organizationis only an administrative arm of the U.S. organization. Certain Canadian, Israeli, or Mexican charitable organizations, under incometax treaties with those countries.A fundraising solicitation is any solicitation for a contribution or gift made in writtenor printed form, by mail, internet, television, radio, or by telephone.Examples of situations excluded from this disclosure requirement include billing: Advertisers in an organization’s publications. Members and nonmembers for food and beverages at a social club. Attendees of a conference conducted by an organization. Individuals for insurance premiums where the organization sponsors oroperates an insurance program. Mandatory payments for members of a homeowners association for fire andpolice protection. Payments for members of a voluntary employees’ beneficiary association. IRCSection 501(c)(9).IRC Section 6113 doesn’t apply to fundraising solicitations of organizations that: Are described in IRC Section 170(c). Have less than 100,000 in annual gross receipts (Form 990-N filers). Solicit only tax exempt organizations. In the case of letters and telephone calls, solicits no more than 10 personsduring the calendar year.Treat a group of exempt organizations as one organization where appropriate. IRCSection 6113(b)(2)(B). Doing so prevents the use of multiple organizations to try tocircumvent the disclosure requirements by keeping annual gross receipts per entitybelow the 100,000 limitation.Certain organizations must tell their members the portion of dues that aren’tdeductible as they relate to the organization’s lobbying and political expenses. IRCSection 6033(e)(1). See also Rev. Proc. 98-19. This can also apply to fundraisingevents held for lobbying purposes for such organizations. These organizations are: 501(c)(4) Social welfare organizations (excludes veteran organizations) 501(c)(5) Labor agricultural and horticultural organizations 501(c)(6) Business Leagues6
Safe Harbor FormatsNotice 88-120 gives safe harbor guidelines of acceptable formats to disclose nondeductibility of contributions in solicitations made via print media, phone, TV, orradio. If an organization doesn’t comply with the guidelines, use a facts andcircumstances test to determine compliance with IRC Section 6113.Solicitations must include “an express statement (in a conspicuous and easilyrecognizable format) that contributions or gifts to such organization are notdeductible as charitable contributions for federal income tax purposes.”Printed solicitations (in mailed letters, leaflets, advertisements in newspapers,magazines, or other print mediums (including web pages)) must meet fourrequirements: The solicitation includes whichever of the following statements the organizationdeems appropriate:o “Contributions or gifts to [name of organization] are not deductible ascharitable contributions for federal income tax purposes.”o “Contributions or gifts to [name of organization] are not tax deductible.”o “Contributions or gifts to [name of organization] are not tax deductibleas charitable contributions.” The statement is in at least the same size type as the primary message statedin the body of the letter, leaflet, or ad. The statement is included on the message side of any card or tear off sectionthat the contributor returns with the contribution. Either the statement is the first sentence in a paragraph or itself constitutes aparagraph.Telephone solicitations must meet three requirements: The solicitation includes whichever of the following statements the organizationdeems appropriate:o “Contributions or gifts to [name of organization] are not deductible ascharitable contributions for federal income tax purposes.”o “Contributions or gifts to [name of organization] are not tax deductible.”o “Contributions or gifts to [name of organization] are not tax deductibleas charitable contributions.” The telephone solicitor must make the statement in close proximity to therequest for contributions during the same telephone call. Written confirmations or billings sent to a person who pledges a contributionduring the solicitation must comply with the requirements stated above.Television solicitations must meet two requirements: The solicitation includes whichever of the following statements the organizationdeems appropriate:o Contributions or gifts to [name of organization] are not deductible ascharitable contributions for federal income tax purposes.”o “Contributions or gifts to [name of organization] are not tax deductible.”7
o “Contributions or gifts to [name of organization] are not tax deductibleas charitable contributions.” Audible statements must be in close proximity to the request for contributions.Written statements displayed on the television screen must be in large, easilyreadable type, appearing for at least five seconds.Radio solicitations must meet two requirements: The solicitation includes whichever of the following statements the organizationdeems appropriate:o Contributions or gifts to [name of organization] are not deductible ascharitable contributions for federal income tax purposes.”o “Contributions or gifts to [name of organization] are not tax deductible.”o “Contributions or gifts to [name of organization] are not tax deductibleas charitable contributions.” The statement is made in close proximity to the request for contributions duringthe same radio solicitation announcement.Quid Pro Quo ContributionsA “quid pro quo contribution” is a payment that is part contribution and partpayment for goods or services (benefits) received from the IRC Section 170(c)organization. If a quid pro quo contribution (the payment) exceeds 75, the Section170(c) organization must issue to the donor a timely written disclosure statement.(IRC Section 6115)Note: No written disclosure statement is required if there is no intent to donate aspart of a transaction, such as in a typical museum gift shop sale. An outright sale isnot a quid pro quo contribution.Note: The written disclosure requirement doesn’t apply to IRC Section 170(c)(1)governmental entities.Exceptions to the written disclosure requirement for quid pro quo contributions areas follows: The token exception The membership benefits exception The intangible religious benefits exceptionThe written disclosure statement is a notice that discloses to donors that they canonly deduct the amount of the payment that is more than the value of the goods orservices they received. The statement must also give a good faith estimate of thegoods or services’ value. The organization can give the donor the statement eitherwhen it solicits or when it receives the payment from the donor. The organizationmust write the statement in a manner that will grab the donor’s attention.Note: A disclosure in small print within a larger document might not meet thisrequirement.Example: A donor gives a charitable organization 100 in exchange for a concertticket with a fair market value of 40. In this example, the donor’s tax deduction8
may not exceed 60. Because the donor’s payment (quid pro quo contribution)exceeds 75, the charitable organization must furnish a written disclosurestatem
Requirements Pub. 526, Charitable Contributions Pub. 561, Determining the Value of Donated Property Pub. 4302, A Charity’s Guide to Vehicle Donations Pub. 4303, A Donor’s Guide to Vehicle Donations Professional Fundraisers Professional fundraisers are people and companies that tax exempt entities hire to raise funds.
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