IRS Says Internet Fundraising is Okay, but Beware of Pitfalls
No prohibition exists against a 501(c)(3) organization using the internet for fundraising, the IRS said in a recently released information letter. Web or email fundraising should comply with the same rules that apply to other solicitations. Since most organizations do some sort of internet solicitation, organizations must be cautious and aware of the requirements. IRS examination guidelines and the recent information letter highlight recommendations to follow.
- Comply with the regular donation substantiation requirements, such as substantiation of quid pro quo contributions of more than $75. Quid pro quo contributions involve providing something of value to donors in exchange for their donations.
- If your organization has not yet received recognition of exemption, disclose this clearly in a conspicuous statement in the solicitation that also states that contributions may not be deductible.
- Avoid any private inurement or private benefit when dealing with professional fundraisers. In this regard, consider any fees that a fundraiser may charge for their services and whether they are reasonable and consistent with your organization’s tax exempt status.
- Selling merchandise or providing advertising on the web site could result in unrelated business income tax. The taxability of such revenue is based on the same principles of law regardless of whether the organization sells the merchandise or advertisements in a gift shop, publication, or on the web. Speak to your tax advisor before putting merchandise, advertisements, or links on the web to determine whether they are or are not taxable activities.
- Comply with state solicitation registration and filing requirements. Currently 40 states and the District of Columbia have charitable solicitation statutes that require an organization to register before soliciting charitable contributions from their respective state residents and to file annual reports. The definition of solicitation includes soliciting on the web, such as having a “donate now” button. However, most states, but not all, require more directed activity in the state or substantial contributions from the state for a web site to rise to the level of soliciting in the state.
- If your organization receives contributions from donors in a state and then corresponds further with those donors, as is usually the case, your organization may have begun to solicit in that state. Review the state requirements as each state has its own form and due dates as well as varying exclusions, exemptions, and minimum thresholds.
If your organization is ineligible to receive tax deductible contributions, its solicitations must disclose that contributions are not deductible. This disclosure must be on web or email solicitation and must be conspicuous enough to ensure that the viewer has an opportunity to see the statement before making the 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
- In plain view before the viewer clicks on the "submit," "transmit," "accept" or other button that transmits their donation information to the soliciting organization
Web sites provide an excellent means to ask for donations as they are often the first place a person looks for information about an organization. However, web sites also openly show compliance, noncompliance, and taxable or prohibited activities to the public, states, and the IRS. IRS examination guidelines instruct IRS examiners to look at organizations’ web sites for required disclosures, proper substantiation of donations, and possible taxable sales of merchandise or advertising. It behooves every organization to have their tax advisor look at their web-based fundraising activities before they are launched and periodically thereafter to avoid risks of noncompliance.
Maxine Romano can be reached at 215-441-4600, or Email.