Due to highly publicized fraud cases and poor governance practices, as well as state budget issues, there is an increasing awareness of the activities of not-for-profit organizations. As a result, there are greater expectations of management by the board and committee members, additional donor inquiries, and new state regulatory requirements.
With all of this increased scrutiny, it is essential that not-for-profit organizations learn how to navigate all of the rules and regulations, especially those relating to state laws. To assist in that goal, here is some useful information and best practices that apply to charitable organizations under 501(c)(3) of the Internal Revenue Code including trade associations, social welfare organizations, and fraternal organizations, among others.
- Establish the tone at the top. Ultimately, the board of directors counts compliance as one of its fiduciary responsibilities. There needs to be clear communication from the board and management that compliance with laws and regulations is important to the organization and is expected of staff and volunteers.
- Invest in education and internal systems to stay compliant and up-to-date on the ever-changing rules. Designate a staff member (usually the CFO) as the compliance expert, hire qualified attorneys and accountants, or do both. This will involve budgeting time and money for reading, attending educational events, and hiring the right professionals.
- Before soliciting donations, check your state’s requirements to see if registration is required. Currently, 38 states, including Pennsylvania and the District of Columbia, require some form of registration. In addition to the initial state registration, an administration fee, excise fee, and annual filing may be required. There are exemptions and many states base the fee on how much is raised annually.
- If your state requires registration, learn the registration process. There have been efforts to standardize and centralize the state registration process with a Unified Registration Statement (URS). Thirty-five states, including Pennsylvania and the District of Columbia, accept the URS. Some states still require supplemental filings in addition to the URS.
- Ensure clear communication between the finance and development functions. Finance and development staff need to communicate with each other about which states’ donations are being solicited and received to ensure compliance with charitable solicitation laws. Solicitations made in person, by mail, via telephone, and online all need to be considered. Keep in mind, states can define “solicitation” differently. The state of Pennsylvania defines any sale, offer, or attempt to sell items of value as a form of solicitation.
- Be aware of state requirements for any professional fundraisers and solicitors that are used and verify their vendors are following them. For example, Pennsylvania requires any organizations soliciting from Pennsylvania citizens to be registered in order comply with the new rules.
- Be aware of online donation solicitations. With the increased use of the Internet for charitable solicitations, the National Association of State Charity Officials (NASCO) developed nonbinding guidance known as the Charleston Principles. The principles determined that if online activity specifically targets residents of a specific state, there is cause for registration. On the flip side, if the organization has only an Internet presence, even if unsolicited funds are received, that isn’t enough to require state registration.
The potential consequences and financial and reputational risks of an organization’s noncompliance with charitable solicitation laws are numerous. An organization can be listed on a state’s website for noncompliance, fined, hit with a state authority agency audit, and forced to return donations. The most extreme outcome is the potential loss of your tax-exempt status.
If you set the tone and do your due diligence, you can help to minimize these risks to your organization.
Maxine Romano can be reached at Email or 215.441.4600.
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