Understanding Fundraising Regulations: A Guide for Board Members

Fundraising serves as a vital mechanism to support a 501(c)(3) public charity’s mission. In today’s world where a reputation can be made or broken in a matter of seconds, effective governance lies at the heart of every successful public charity. Board members assume a critical role in this endeavor as they are the guardians of the nonprofit’s reputation, financial health, and commitment to ethical practices.

According to IRS Compliance Guidelines for 501(c)(3) Public Charities, “A governing board should be composed of persons who are informed and active in overseeing a charity’s operations and finances. To guard against insider transactions that could result in misuse of charitable assets, the governing board should include independent members and should not be dominated by employees or others who are not independent because of business or family relationships.”

Board members must grapple with the many perplexing rules and regulations connected to nonprofits that heavily rely on public and governmental support. Failure to comply with these rules may trigger severe repercussions including hefty fines, forfeiture of government grants, or even the loss of their 501(c)(3) status. Ensuring compliance is an essential duty for every board member.

Here are some key insights we share with our clients to ensure adherence to 501(c)(3) fundraising regulations.

Understand Form 990

More than just a tax document, Form 990 is vital tool for nonprofit organizations. It showcases a nonprofit’s financial information, mission, and governance practices to both the public and the IRS. It sheds light into how donations and funds are utilized.

According to the IRS, “While 501(c)(3) public charities are exempt from federal income tax, most of these organizations have information reporting obligations under the IRC to ensure that they continue to be recognized as tax-exempt. In addition, they may also be liable for employment taxes, unrelated business income tax, excise taxes and certain state and local taxes.”

Which Form 990 an organization files depends on their financial activity.

  • Form 990-N: Gross receipts are $50K or less
  • Form 990-EZ: Gross receipts are less than $200K and total assets are less than $500K
  • Form 990: Gross receipts are $200K or more or total assets are $500K or more
  • Failure to file a Form 990 annually with the IRS can come with substantial penalties including steep fines or revocation of tax-exempt status. No matter what the level of activity, some Form 990 must be filed each year. The IRS considers it a best practice for the 990 to be presented to the full board before filing each year.

    There are also a number of other federal compliance requirements related to donor acknowledgements and fundraising solicitations. The IRS provides a wealth of information on these requirements on their website www.irs.gov.

    Know Your State Filing Requirements

    Forty-two require nonprofits to register with the state before soliciting donations. State laws may have additional requirements that also need to be followed like providing donors with a written disclosure statement.

    For example, in Florida disclosure requirements must include all of the following at the point of solicitation: (a) The name of the charitable organization or sponsor and state of the principal place of business of the charitable organization or sponsor.; (b) A description of the purpose or purposes for which the solicitation is being made.; (c) Upon request, the name and either the address or telephone number of a representative to whom inquiries may could be addressed.; (d) Upon request, the amount of the contribution which may be deducted as a charitable contribution under federal income tax laws.; (e) Upon request, the source from which a written financial statement may be obtained. Whereas, New York disclosure requirements must include all information specifically required by Exec. Law 172-e(2); AND a copy of the Annual Financial Report(s) encompassing the entire reporting period for which the Funding Disclosure is made, or the most recent Annual Financial Report filed, including all required forms and attachments and the associated Schedule B(s).

    As with federal compliance, failure to meet state obligations can result in fines and revocation of nonprofit status. In some states (e.g., California, New York, Massachusetts), board members can be held personally liable for several reasons, including failure to file necessary tax returns. It is imperative for both the nonprofit and its board members to meet their state’s requirements.

    The IRS provides state government website links for tax-exempt organizations so you can easily access your state filing requirements.

    Don't be surprised that the requirements in every state are different. It’s important to re-consider every year if your organization is correctly registered in the states where you are soliciting.

    Staying Up-to-Date on Compliance Regulations

    As fundraising compliance regulations are essential and noncompliance can impact both a nonprofit as well as a board member’s reputation, it’s essential to stay well-informed and up-to-date on the latest regulations. One effective approach is to establish an oversight committee tasked with regularly reviewing, interpreting, and disseminating information regarding evolving compliance standards and legal updates.

    Engaging in continuous education and training programs focused on compliance issues is also extremely beneficial for board members. Our nonprofit experts at HBK can help ensure your organization stays up-to-date and informed on all fundraising compliance issues.

    About the Author(s)
    Kathleen has over 40 years of experience providing auditing, accounting, tax and consulting services to privately held businesses and not-for-profit organizations. She specializes in preparing tax-exempt status applications, consulting on charitable regulations, and providing outsourced management and accounting services. She routinely consults with organizations that receive federal and state funding. Kathleen as worked with a wide variety of nonprofit organizations, including membership organizations, public charities, private foundations, and special improvement districts. She frequently addresses conferences and meetings, and business and governmental organizations on nonprofit-related issues. Her community service includes positions on several boards, including currently as vice-chair of the Union County Education Services Foundation and previously the Two Hundred Club of Union County and the United Way of Union County.
    Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.