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Are You Misappropriating Your Nonprofit’s Funds? March 23, 2017
Greg McRay, EA
Education, Managing a Nonprofit
One of the things that you learn quickly when starting and operating a 501(c)(3) organization is that you have to handle money wisely. A nonprofit is no different than any other business in that you must make ends meet. Otherwise, your charity will cease to exist. The current economic difficulties make this task even more challenging as we all are stretching dollars until they are seethrough. But here’s a question you probably haven’t considered: In all of your efforts to keep the lights on, could it be that you are misappropriating funds without knowing it? Is it possible that you are even committing a crime? If you do not understand what the IRS requires regarding designated funds, you might be. I cannot begin to tell you how many times we see this situation messed up. Most of the time, it is an innocent attempt by a board or executive director to just be good stewards of the money people have donated. For example, suppose things are tight at the soup kitchen. There is not enough cash in the general operating fund to buy all the food that is needed for the upcoming Christmas season. There is, however, a pretty good chunk of cash sitting in the fund designated for building a new facility. And, in truth, the food shortage is a far more pressing need. It is unlikely a building project will be started for at least two years. Is it OK to divert some of the building fund money to the food fund? Maybe…or maybe not.
Two Types of Designated Funds Understanding that there are two types of designated funds (or donations), solicited and unsolicited, is the first step in getting this right. Let’s take a look at each: Solicited designations. A solicitation means that your organization asked for donations for a particular cause. Maybe it was by letter, email, website, radio spot…it doesn’t really matter. What matters is that donations given in response to a direct solicitation are to be permanently dedicated to that purpose. In our soup kitchen example, the board cannot move that money around, no matter how dire the circumstances, if those funds are the result of a solicitation. Just last week, many of you may have read the story of the director of a large, national charity resigning after it was found he did just this very thing. Was it for a good reason? Yes. Was it illegal? Unfortunately, yes. Unsolicited designations. These are donated funds that the donor designates without having been solicited by the charity. For example, Bob decides to donate $100 to the local soup kitchen, but on his own decides to “designate” that those funds be used for future expansion. In this situation, can the charity legally divert that money to its food fund? This may surprise you…but the answer is, “Yes!” To be fair, there are certainly times where it is politically expedient to honor an unsolicited designation, but the key point is that only the charity itself can tie strings to the donation. This news often comes as a welcome relief to charities that have struggled with how to deal with these situations. One more point about solicited designations…there are ways to avoid this problem. First, provide a disclaimer with your solicitation that the organization reserves the right to move money as it sees fit. Or, that any funds received over and above the budget of the solicited purpose will be put into the general fund. In a situation where it’s too late for a disclaimer, you can go back to donors and ask permission to retask their donations. Keep in mind that they have the legal right to say no, though that is unlikely in most legitimate situations of need. Handling the finances of a nonprofit is always a challenge. Knowing how to properly address designations is crucial to staying out of trouble with your donors…and the law.
Greg McRay, EA Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.
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Jerry Strutz I am the Chairman of a 501c3 that collects funds for scholarships and have been approached by the 1967 class at Guest
the school to see if they can use our 501c3 corporation to put their funds for reunion through. I believe the thinking is that the money collected would be tax deductible to any person attending the reunion. The Foundation would then pay out the money for the reunion expenses and they agreed for us to keep $1000 for them using the corporation.The reunion committee told me they checked this out and it is legal, please give me your thoughts.
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4 months 28 days ago
Justin Williamson This is not something the 501(c)(3) should be involved with. Hosting a social event, like a class reunion, is not a qualifying exempt activity in the eyes of the IRS. I would encourage them to be good patrons to
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the school and donate to the scholarship fund, but funding the class reunion would be a misuse of the organization’s tax-exempt status.
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4 months 22 days ago
Maureen Marty I’m the treasurer of a nonprofit 501(3) religious organization. We’ve been doing a fundraising effort to purchase a Guest
residence and temple for the teacher (lama – he’s Buddhist). To purchase property in the nonprofit’s name, we need to put down at least 35%, but if our teacher purchased it under his name it would only be 20% (commercial vs residential). Can we used the funds that have already been donated to the nonprofit for this temple purchase to give to our teacher so he can buy a residence/temple under his name? Thank you.
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4 months 28 days ago
Justin Williamson Giving donated money to the individual would be a misappropriation of funds. I understand the intent behind the idea. Giving the money to the teacher to make the purchase makes economic sense, but the
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nonprofit has an obligation to only use funds in a way that directly benefits the organization. Giving donated funds to the teacher benefits him personally and does not guarantee the funds will be used to further the organization’s purpose. You also need to think about the long-term plan for the residence. Is the organization going to use its money to maintain the property? If so, then… Read more »
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4 months 22 days ago
Jean I was recently part of a fundraising effort for a mission trip. Apparel was sold with money raised to go into a Guest
general fund for all scheduled trips yet later found out no money ever was given to the trips because the cost of the shirts was paid first. This was never disclosed to the people who purchased the shirts. 2nd a person put in her fundraising letters that she may use the money for passports and other personal expenses. It was later found out she was given a refund of the overage she collected for the mission trip instead… Read more »
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5 months 8 days ago
Justin Williamson In your first scenario, the nonprofit does need to cover the expenses of the shirts in order to deliver them. It may be acceptable from a legal point of view, but not from a donor expectation point of view.
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It seems like a fundraising effort that was not coordinated properly. Your second scenario is a little vague to go into detail, but it doesn’t sound like there is any legal structure with this mission trip. It may be advisable to organize this into a nonprofit entity. That way, the organization can collect the donations, and distribute the money to the… Read more »
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4 months 22 days ago
Judy Can a non profit loan the money donated to a person that needs help and expect that person to pay back the Guest
money.
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5 months 9 days ago
Justin Williamson This is not a practice we would advise. The nonprofit runs a major risk in overseeing the money given to the individual. Additionally, a nonprofit’s revenue can only be spent in a way that furthers its exempt
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purpose or is given to another charitable cause. Simply giving funds to an individual doesn’t directly fall into either category.
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4 months 22 days ago
Candi Aberle Hi….I am the secretary on the board of directors for a Illinois non-profit horse club. We have an account with Guest
appx 13,000.00 held in it for expenses of the club, and take in monies for each horse show we put on. Currently, the club, is not spending the funds for expenses and improvements, at the same rate as we are accumulating funds. So our accounts are growing each year. My ?: What is the Illinois law for rolling funds over from year to year in our accounts? Are we responsible legally to be spending more on improvements to the clubhouse,… Read more »
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5 months 9 days ago
Justin Williamson There typically isn’t going to be a set amount or percentage of what you are allowed to roll over from year to the next. One common misconception with nonprofits is they must spend the money they make
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each year. That is simply not the case. It really comes down to what is in the best interest of the organization. If you can make improvements to your facilities while not endangering your long-term success, then it sounds like a good use of the funds. But if you continue to accumulate funds for a bigger project down the road, there’s not going… Read more »
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4 months 22 days ago
Marie My mother passed away and the non profit she ran solicited donations in her name our family is disgusted that Guest
people are benefiting off of her death. We were never asked permission and we suspect the money is being used for personal gain what can we do? They used PayPal and their records don’t show the business’s email address we believe its going into personal accounts
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5 months 12 days ago
Justin Williamson Our advice would be to speak to a local attorney. If you have any evidence about the solicitations going into personal accounts, you may be able to contact your state’s Division of Charities.
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4 months 22 days ago
Tamee A friend had a charity benefit to raise money for my son-in-laws funeral and for his only daughter which I am the Guest
guardian of. After the benefit I contacted this person and they said they put the money in a savings account and will not give me the money that was raised. Is this against the law? What can I do to get the money that was raised for my granddaughter?
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5 months 16 days ago
Justin Williamson If the donations went directly to an individual and not an organization, there isn’t a lot that can be done about the situation. It’s always a risk giving money to an individual instead of a charitable organization
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that has been vetted by the IRS. Perhaps you can speak with a lawyer who may be able to assist you in another manner.
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4 months 21 days ago
Lorraine My daughter is apart of a non profit gymnastic studio. We pay monthly for her tution but I have just found out Guest
that the empoyees who teach at the studio have not been paid for months. I want to ask for an acccounting of the funds at the studio as we are going to lose the teachers if they are not paid. There is a parent who sits as the board president who is saying there is no money. Isn’t the board obligated to pay the employees before other debits? Even if the non profit is running in the red… Read more »
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5 months 18 days ago
Justin Williamson This doesn’t look like a good situation at all. If the teachers are employees of the nonprofit (filing W-2’s provided by the organization with their taxes each year), there are federal and state regulations the
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organization must abide by, including minimum wage requirements. Teachers should either agree to volunteer their time to continue teaching, or the organization should stop its activities until enough funding is secured to continue operations.
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5 months 16 days ago
Mae Conatser A member of our church wants us to sponsor a marathon racing event to benefit a mission group in Haiti with Guest
which he is personally affiliated. The member would use our church presence to represent the event and would collect all monies received. He would decide what were expenses of the event and what profit he would donate to the mission. Our church does have 501(c)(3) status; however, our pastor is concerned about the legality of using the church as a front for this effort. He has asked me, as treasurer, to research the matter to determine whether we are… Read more »
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5 months 18 days ago
Justin Williamson Without knowing the full details of how the mission group in Haiti operates, this has potential to be problematic for the church. It is generally a bad idea for an individual to be directly responsible for the
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fundraising. It’s especially bad if they are handling the money directly, but your church is accountable for the outcome. It looks like a better move for the church might be to agree to sponsor the event, collect the donated funds, and donate raised money over and above the event costs to the group directly. However, there may also be issues with this if… Read more »
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5 months 16 days ago
Jane My nephew raised money for living expenses for himself his partner and his daughter who would be spending 10 Guest
weeks in USA whilSt his daughter had proton beam therapy. On their return to the UK there was some funds left. He has a conservatory built and bought several items from said funds. Is this misappropriation?
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5 months 22 days ago
Justin Williamson It doesn’t sound like the donated money went through any sort of charity or nonprofit entity. If that’s the case, none of the money raised is considered tax-deductible charitable donations, so there is no means
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for misappropriation. He can use it as he sees fit. If it did run through a 501(c)(3) charity, however, his actions would likely constitute misuse of funds.
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5 months 20 days ago
Barrett Another question regarding our 501c3 soccer club… Guest
We have one team attending a tournament. Can all of the parents for this one team pay their registration fees to the club and the club then sends a check to the tournament for the team registration? Or, do all funds that come into the club need to be used to benefit all players, not just this one team? Thank you
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5 months 23 days ago
Justin Williamson Where you typically have problems is when donations and fundraising revenue are targeted toward the benefit of specific people. In this case, it sounds like you are describing participation fees, which should
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not normally be considered tax-deductible donations. As such, they can be targeted precisely where they need to be applied.
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5 months 20 days ago
Barrett We have a 501c3 to run our soccer club. Is it possible for a sponsor/donor to donate funds directly to one of the Guest
teams within our club? For instance, can they donate money to pay for all of the uniforms, for one team?
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5 months 23 days ago
Justin Williamson As long as none of the organization’s legal documents have measures that state the club must evenly distribute funds to each team, you should be fine.
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5 months 20 days ago
Lisa I need to ask a question. Our cheerleading team went out and got donations for our uniforms. Now the leader says Guest
there may not be a cheerleading team this year. She says she will put the money in an account and can be used in 2018. Is this correct? We raised money for this year. And we are not even sure there will be a team next year.
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5 months 26 days ago
Greg McRay, EA Well, this certainly sounds awkward, but is probably not too dire. Your choices are to return the donations, or simply inform the donors of the situation, along with the intent of using the funds next
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year. Some donors may want their donation back, and should be able to get it, seeing as the donations were solicited for 2017. Should no team manifest next year, you should probably refund all remaining donations and call it a day.
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5 months 24 days ago
Christine K A cheer organization is a non-profit and solicits to the parents that they can work certain events to earn $$ toward Guest
their daughter’s competition expenses in Vegas. A mom raises enough to cover all expenses for that competition, and then after the fact they change their mind on the rules for such. This parent has a $300 credit sitting in their daughter’s account (which is designated for that child). The child is not returning to the organization this year. The organization is saying that they can use those funds for any reason they choose. We disagree since it is a… Read more »
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5 months 26 days ago
Justin Williamson Unfortunately, this very practice is all-too-common among youth athletic organizations. The IRS has ruled that raising donations for specific individuals is not allowed. In order to be in compliance with IRS
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guidelines, all donated money must go to the organization, then spread out equally among all participants. The children involved should not have a designated account. Following these guidelines prevent these types of problems from occurring. The sooner the organization changes how they are designating these funds, the better.
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5 months 23 days ago
Stephanie We are an “American Friends group” supporting a UK educational institution. If the friends and family of an Guest
American student want to help with the student’s school fees can they donate to us, getting their tax deduction, and have us wire that amount over to the UK?
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5 months 26 days ago
Greg McRay, EA Not unless that student has already been targeted as a recipient of funding by your organization. If the student has, it should be OK. Donors CAN have relationship with recipients. However, if the family is
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approaching your group for this arrangement and you don’t have prior knowledge or relationship with the student, don’t do it. The IRS doesn’t look favorably on this and may even consider it tax fraud. We hear about these situations with clients frequently. Avoid facilitating what we call “donation laundering”.
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5 months 24 days ago
Abby Please note that even if a donor gives an unsolicited gift, but restricts the use or time period–it is restricted for that Guest
specific use and cannot be used for another purpose unless the donor approves the change. Donations do not have to be solicited to be restricted. Also note that all pledges are restricted (temporarily) as there’s an inherent time restriction component. See the Accounting Standards Codification for the accounting rules regarding donor restrictions. Only donors can place restrictions on their gifts–the organization cannot do so. The organization can internally designate unrestricted funds received, but those remain classified as unrestricted… Read more »
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5 months 27 days ago
WIlliam If a 501c3 is raising money for say a specific purpose (build a new building?) and decides later not to build this Guest
building. What , if any obligation does the foundation have to its donors to give the collected donations back?
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6 months 2 days ago
Abby You have a fiduciary duty to contact the donor to discuss other options for using their gift. or, if they are not interested in other options, return their money.
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5 months 27 days ago
Mike Addorisio Greg, My in laws have a non profit and are in a book deal with the author of the book while they are the Guest
illustrators of the pictures and photographs in that book. The question is: What is the best way to receive any proceeds earned from this book when it launches if the income assignment in the contract between the nonprofit and the author is 50/50? Should the author take all the proceeds and pay tax on her portion since she is an author and then disperse the other half to the nonprofit? She wouldn’t pay taxes on the… Read more »
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6 months 6 days ago
Todd Hello. Guest
I am the president of a 501c3 Soccer Club. We receive many donations from corporations and from family members. Family members are constantly wanting us to direct their donations to a specific child to reduce their fees. I know this is not considered a legitimate donation for them to deduct, but what is this illegal for my organization? Is this misappropriation of funds if we directed the donation specifically? Thank you,
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6 months 8 days ago
Justin Williamson In certain circumstances, donations can be designated for a specific purpose. The donations, however, usually cannot be directed towards an individual. Many nonprofits use this funding model, but is
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absolutely IRS prohibited. So, yes, it is considered a misappropriation. Some organizations have a free or reduced membership application for families with financial burdens. That could be an option to explore that will allow you to help specific children without giving donations directly to them.
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6 months 7 days ago
Courtney If a 501(c)(3) dontaes monies to an outside entity than what it was setup for, is that illegal? Example: a local high Guest
school athletic booster club is designed to raise monies for the athletic programs of that particular school. The booster club donates a large sum of monies (100k) to a county educational foundation. The foundation does not contribute directly to that school or its athletic programs. The president of the educational foundation is also the sister of the booster club president.
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6 months 9 days ago
Justin Williamson A 501(c)(3) can donate to other tax-exempt organizations; if the educational foundation is an established 501(c)(3), the booster club can donate funds to it. But it comes down to what is in the best interest of the
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booster club. If it cannot support its own purpose or activities because of the sum being given to the educational foundation, that would be a reason to be concerned.
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6 months 7 days ago
KALLI I was part of a non profit, tax exempt, FFA Backers committy. They worked at a local race track who donated Guest
money to them using the FFA Backers tax exempt status for kids to use for their state convention and whatever entry fees they would have next year. The teacher won’t accept a check from the backers for this and told the president to write individual checks to the students and let the students use the money how they see fit. Is this legal? Can a tax exempt roginazation work and get money as a donation and they pay the… Read more »
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6 months 10 days ago
Justin Williamson It’s not necessarily evasion, but it is a bad idea. If you gave individuals checks directly, then expenditure accountability would be required of the students by the nonprofit to ensure monies are spent for a truly
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charitable purpose. That seems very unrealistic. It would be best practice for the FFA to pay the convention fees on behalf of the person.
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6 months 7 days ago
Tony Under a 501 (c)(3) can donations paid in be refunded back to reduce say a participation cost or dues. Example: Guest
parents pay dues to participate in an organized sporting event, donations are taken and the non profit refunds back a portion of the dues from donated funds?
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6 months 18 days ago
Justin Williamson This is not a good idea. Money donated to a 501(c)(3) charity should be used for the charitable purposes of the organization, not to rebate member dues. Going forward, however, if the nonprofit anticipates
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future donations to remain that high, it may want to reduce future dues.
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6 months 15 days ago
Agnes chambers Is it considered a conflict of interest If the spouse of the president/executive director of a non profit donates land Guest
for a Development that will generate income for the non profit
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6 months 21 days ago
Justin Williamson There’s an obvious connection to insiders here, but it doesn’t sound like a conflict on the surface. So long as the transaction is truly a donation and there is no back-channel benefit to the donor, it should be
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fine.
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6 months 15 days ago
Peter Can someone take funds in a 501c non profit and pay for personal expenses? Guest
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6 months 27 days ago
Justin Williamson Without knowing the full situation, this is a definite no. Any funds donated to a nonprofit must be used for a charitable purpose and not by insiders.
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6 months 15 days ago
Carmen Need help, we have a representative and he has money that was giving to him for donations, so far he has 1500. Guest
No other donations were done. Can we ask the representative for the money back, can that money go back to the checking account of the non profit? Or we let him continue to hold the money until we find another place to donate?
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6 months 28 days ago
Carmen I am a me mber of a non profit, every the money obtained thru events, is giving to different hospitals, needed Guest
people, disabled children etc. This a representative a named to distributed de money $2000, 500$ was given to a group of handicap eldelrs, 1500 remains with the representative it’s three months and money was not distributed. Can the non profits request the money back to the representative?
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6 months 28 days ago
Dan Hoesel can a 501(c)(3) give monies raised to an individual??? Example Guest
We have a golf tournament to raise funds for a named individual needing a major medical procedure. Can these funds be given to that named individual???
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6 months 28 days ago
Justin Williamson This is hard to answer, mainly because there are so many potential facts not stated. A new organization cannot be formed to exclusively assist one named individual, no matter how noble the cause. If it’s an
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existing nonprofit, it is possible, but not best practice to give the money directly to the person. Expenditure accountability is required of the nonprofit to ensure monies are spent for a truly charitable purpose. It is best to pay expenses on behalf of the person. Also, make sure the true financial neediness is objectively evaluated.
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6 months 15 days ago
Jim T Forgot to mention that the pastor did announce to the congregation from the pulpit one weekend that we were Guest
doing this. People complained to each other but no one brought their gripes to him.
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5 years 16 days ago
Guest This is a very old article. Is this info still current? I have a non profit where I’m the president but pay myself as a contractor to train. It’s what I do in life
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as a job as well. Is this ok?
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7 months 21 hours ago
Justin Williamson If you are being compensated by the nonprofit, it should have been voted on by the board of directors, with you being recused from the discussion. The compensation amount should also be
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set by the other board members.
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6 months 15 days ago
Jim T Our church had and is still in the midst of a Capital Funds Campaign. We have solicited donations specifically for Guest
this building fund with personalized envelopes with the name of our campaign printed on them. For three years the congregation has been giving to this building fund. With the economy being the way it is and offering down for over a year and a half, the staff was told that they have been taking monies that are designated for the building fund and using it to pay for overhead such as staff salaries and bills for over a year. When… Read more »
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5 years 16 days ago
ChristineMM I wish you would write a similar post for when designated funds were solicited to buy an object and what happens Guest
to that physical object. Also if a person buys the object and donates it for a group to use and what happens if it is being used by others that were not “designated”. I’m talking about after the money is spent, not the cash flows.
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5 years 9 months ago
Kimberly I have a concern. I serve on the Board of a small nonprofit. We had a meet and greet (our first) in January and a Guest
few of the people gave checks to the organization. When the Co-Directors (husband and wife) had us send the tax acknowledgement, they changed the wording saying that “every effort would be made to use for the nonprofit but the funds may be used for something else”…. is this misappropriation?
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5 years 9 months ago
Greg McRay, EA It’s OK unless the donors were solicited for a restricted purpose. Such a disclaimer is fair game in the solicitation, but not after the fact in a receipt.
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5 years 8 months ago
David Good afternoon Greg, I am am a new volunteer for a non profit organization 501(c)3. Over the past two years, the Guest
organization solicited donors through direct appeal (letters and emails) requesting donatoins for a specific purpose. The organization received contributions from the solicitations and it was later determined that the funds received were used for purposes other than the purpose outlined in the appeal letters and emails. The organization does not have adequate funds to cover the temporary restriction on funds (difference between amount received versus the amount expended for the purpose defined in the solicitation) Organizational management has sent… Read more »
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5 years 9 months ago
Greg McRay, EA No it isn’t sufficient. Donor approval must be received to reallocate money based on a specific restricted solicitation. Some nonprofits include a disclaimer in their solicitations that the organization reserves the
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right to allocate monies as needed in order to avoid the situation you are in now.
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5 years 8 months ago
Africa I recently donated to support a friend’s mission trip to Africa. She instructed me to send the check directly to the Guest
church, made payable to the church. They said they couldn’t accept the donation because I put “Amy’s Africa Mission Trip” in the subject line (for my own memory purposes). They said there couldn’t be any indication of her name in order for them to accept it. Do you think that is legitimate and why would that matter?
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5 years 9 months ago
Greg McRay, EA They are way off base…probably got some bad advice from someone along the way. Your donation is designated for a distinct purpose, so notating that in the memo is very appropriate.
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5 years 8 months ago
Ruth I recently became president of a garden club with non-profit status. I am trying to establish a budget and make Guest
sure we are doing everything correctly. We have two fund raising events each year to raise funds for a horticulture scholarship and to support other gardening projects in the community. The first event is a plant sale where members contribute plants from their yards. In the past they have been given a receipt to fill out of what they determine the value of the donated plants (from their yards) to be. Should we be giving members a receipt for a… Read more »
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5 years 9 months ago
Greg McRay, EA Lots of questions. I’ll tackle them in order. If the members who donate plants aren’t getting the unsold ones back, they should still get a receipt. As
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to the nurseries, any donation receipt should allow them to fill out a value themselves, but your organization should never value tangible gifts for the donor…even if something clearly has a FMV. Lastly, unless you are telling your donors that 100% of their donation is going to a specific program, some of the funds can certainly go toward overhead.
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5 years 8 months ago
janet I am on the finance committee at our church. We have a general fund(checking account), a building/construction Guest
fund(savings), and a Youth/Family Life center building account(savings). questions have been raised to the legalities of monies being transferred from the Youth/Family Life Building account into the general fund account. I was told the money could not be transferred because it is in a “Designated account”.
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5 years 10 months ago
Greg McRay, EA It matters more how the money got into the “designated account”. If it was by soliciting donors for that express designation, then the money is restricted and shouldn’t be moved. If any of the money in that
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account was transferred there or was the result of unsolicited designations, then that money can be retasked as necessary.
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5 years 10 months ago
joe SIR, Guest
I just read a story where a child solicited contributions on the web, and used the funds to pay missed payments, avoiding forclosure. Is this legal? I remember someone doing this a few years ago and was prosecuted for mail fraud by the postal service. Which is legal? If it is legal, what keeps me from having my teen set up a nonprofit, collect money and pay off my house? joe
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5 years 10 months ago
Greg McRay, EA Whether or not the solicitation was legal would depend upon local or state solicitation laws. No federal laws would have been broken. That being said, any money “donated” wasn’t tax-deductible to the donor
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because the gift wasn’t given to a recognized charity.
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5 years 10 months ago
Murvyn What if a fund-raising program becomes wildly successful and the organization is able to raise more money than Guest
expected — or planned for — to meet the monetary needs of the program? Scenario: Board designates a solicitation campaign (via Christmas caroling) to raise money for a medical mission overseas. Initial estimates set the goal at $4,000. The campaign is wildly successful and the organization is able to raise $6,000. Is the Board required to spend all the $6,000 raised all at once (towards the designated program). Or can the Board authorize the expenditure of $4,000 towards the program for this… Read more »
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5 years 10 months ago
Greg McRay, EA Excess donations could be used for the same program next year. A good idea is to let that be known upfront during your solicitations.
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5 years 10 months ago
Murvyn Thanks, Greg! Much appreciated. Will let the Board know that, going forward, potential donors need to be informed beforehand that excess monies will be used to fund future missions. Thanks
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again!
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5 years 10 months ago
Alice Martin Can a 501 C3 church refuse to give you a annual donors statement (tithes/offerings) of the cash contributions that Guest
you gave through out the year? And also, can they suggest to you, instead of giving your cash donations directly to the church, open up a personal checking account and put your tithes in it, and if the church needs to access it you have to let them. The account is suppose to be to help out if someone in the church has a need?
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5 years 10 months ago
Greg McRay, EA Not enough details here, but it sounds squirrelly to me! Author
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5 years 10 months ago
Lance Geiger I am the treasurer for a school booster organization. Recently there was a family in need that used to be part of our Guest
organization (still is in spirit). Some wanted to take some money raised from our organization to help this family. I said we couldn’t for the reasons you described in your article. Was I correct due to the fact the money was not going to what we solicited it for?
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5 years 10 months ago
Greg McRay, EA If the money was raised for a designated purpose, you are correct. Author
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5 years 10 months ago
Chris This was an incredibly helpful article. I am struggling, however, to find this info on the IRS website. Where Guest
would I find the actual law/code so that I can keep it for reference?
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5 years 10 months ago
Greg McRay, EA Like many legal issues, it is not always chapter and verse. It is often an extrapolation of broader principles. An example is the IRS prohibition against private benefit, which specifically leads to boards
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that must be a majority unrelated by blood, marriage and outside business ownership. The latter is not an articulated rule, but is nevertheless prohibited based on the broader prohibition. Start with IRS Publication 557 for a primer.
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5 years 10 months ago
Brian My church has a pledge drive each year for the national denominations missions fund. During the drive we are Guest
encouraged both from the pulpit and via video provided by the denomination to pledge a yearly amount of giving. The donations are collected at the local church then sent to the national office. I recently learned that the pastor has taken those funds to help with operational expenses for the actual church. The way I understand the above information is that not illegal since the fund is nationally solicited?
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5 years 11 months ago
Greg McRay, EA Obviously I do not know all the details of your situation, but it sounds outside the bounds. Unless a disclaimer was given at the time of the solicitation that the funds could be redirected at the discretion of
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the church, then this is a textbook example of misappropriation. It is both unethical and illegal.
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5 years 11 months ago
Jon Can a non-profit 501(c)(3) organization (Party A) accept donations solicited by a church (Party B) for a Senior Guest
Center (Party C). Party A and Party B worked together on an event held at the church and the pastor took up a cash offering for Party C but asked that any checks be made out to Party A and those funds would be donated to Party C. Party A has no problem depositing the checks into Party A’s account and making a donation to Party C in the amount of those checks. Do you see any issues with doing so?
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5 years 11 months ago
Greg McRay, EA Assuming I didn’t get lost in the alphabet soup, it sounds OK as long as all parties are 501c3 organizations.
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5 years 11 months ago
Myrtie We are a small committee that aids a university with its elder education program. We receive money for Guest
educational purposes from a 501C3 earmarked for the purchase of books. Can we ignore this desire by the donor? Can we embed this money into the general fund? Are we legally required to account for the spending of these funds?
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5 years 11 months ago
Greg McRay, EA I would need to know more detail before giving specific advice, but this can be a fine line. If the earmark was solicited for that purpose by the 501c3, then using the money for another purpose is not
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legal. If the money was only earmarked by the donor, then it gets trickier. Did the 501c3 communicate intent to honor the earmark? If so, retasking the funds may not be illegal, but it is certainly bad for PR.
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5 years 11 months ago
S Walden Additional information for above question: The director (pastor) is not currently receiving a salary from the Guest
ministry, they simply write checks out of the non-profit’s checking account for personal bills.
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5 years 11 months ago
Greg McRay, EA If the ministry is a 501(c)(3), then it is NOT OK. Many small ministry organizations are actually sole proprietorships that have never formalized into a real nonprofit and are, in effect, a virtual extension of
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the individual. Assuming this is not the case, the pastor’s practice of using ministry funds for personal expenses is illegal and could subject him, the ministry and its board to a world of hurt.
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5 years 11 months ago
S Walden I am the bookkeeper for a very small non profit ministry. Is it legal for the director to use the non profits funds Guest
for covering personal expenses such as medical insurance, home equity loan, personal residence utilities?
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5 years 11 months ago
Rita I work with several non-profits. One of them has a donor who gives to the organization and designates the funds Guest
to go directly to a family member who is having financial problems. I think this is illegal use of a non-profit and could cause us to lose our non-profit status. Am I right and where can find the answer so I can prove it to the directors.
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5 years 11 months ago
Greg McRay, EA “Illegal” is a strong word, but what is going on is certainly a very bad practice. The donor is essentially laundering money by running a personal gift through the nonprofit. Usually this is done for the sake of
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anonymity, but it’s still a problem. If the nonprofit is giving a tax deductible receipt, it is potential fraud. The only exception would be if the nonprofit was already helping the recipient and the relative was merely assisting the effort. Proving this via the IRS code is more difficult than a chapter and verse approach. The prohibition is the result of several… Read more »
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5 years 11 months ago
Joe Greg, excellent stuff. I am on the Board on a Baseball Travel team open to the Public. A few questions arose. Can Guest
the officers collect a small salary? Also fundraising. Two part question. Leys say you live in Chicago and there is a tournament in Texas. Can you fundraise for the tournament – specifically state you are raising money for airfare and hotel stay/along with tournament fees, would this be a problem with the IRS and the 501c3 designation? Lets say you fund raised for your General Fund and were not specific as to what the monies would be spent… Read more »
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6 years 17 days ago
Greg McRay, EA 1. Never pay officers. 2. The other scenarios sound fine to me.
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5 years 10 months ago
Dawn Greg I thank you so much for this site and the work you've done here. As a board member on a non-profit it is Guest
beyond helpful in times of "confusion" So Greg, here's my question…I sit on the board of a large charity (501c3). In a recent meeting it came to my attention for the first time that the entity has been "borrowing" from temporarily restricted funds. These funds come from two sources. One is a specific solicitation held during an auction to fund scholarships for programs. The solicitation is very specific to the scholarship fund (ie raise your… Read more »
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6 years 2 months ago
Greg McRay, EA Your situation is not uncommon, unfortunately. But the fact that it is common does not make it a best practice. So-called "borrowing" from restricted funds is called an intraorganizational loan and should be
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avoided. I'm a big fan of the Evangelical Counsel for Financial Accountability's (ECFA) take on this. They have a great article on this subject, http://www.ecfa.org/Content/Borrowing-Restricted-…. The gist of it is, don't do it. Even if it's legal, it is not considered ethical.
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6 years 2 months ago
Terry Hello my wife is treasurer for the local youth football league and has been for 3 years. The president last year Guest
decided to use funds to fix a needy parents vehicle ( a loan which han not been repaid) without board knowledge. Simply directing my wife to co-sign a check to pay for such. He then decided he was going to start his own charitage foundation and use league funds to finace his foundation. he borrowed $2000 to buy a very large amount of football player cards. He has repaid $600 but has taken a year to repay even that… Read more »
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6 years 3 months ago
Greg McRay, EA If she has no practical way to influence the behavior of this board, she needs to get out. The president's actions are totally inappropriate and could result in IRS sanctions against all board members for allowing
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it to happen. If she resigns, make sure her resignation letter spells out in detail her reasons for leaving. As treasurer, anything she has cooperated with, even if she disapproved, could blow up in her face. Good luck to you. I hope it works out.
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6 years 2 months ago
Tashe My group puts on an annual event in which an international spiritual person visits our city as part of his national Guest
tour to 25 or so cities across the US. We solicit donations to pay for this annual event in our city, as do all the other cities on the tour. We are not legally organized, just a group of people who put on the event, but there is a national organization that is a registered 501c3 non-profit. Our local group does not fall under the umbrella of the 501c3, so in order for donors to receive tax receipts for… Read more »
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6 years 3 months ago
Greg McRay, EA This is a tough situation, but the national organization may well be within its rights to exact a Author
percentage. You don't have an actual nonprofit. Donors are (in effect) giving to the national organization, which has the ability to spend its money however it deems appropriate…so long as it does so legally. Unless you are acting as a soliciting agent of the national group, these designations have not been solicited by national. It sounds like they are simply doing you a favor. If that's true, you do not really have a case. You have a problem, no doubt…but not an… Read more »
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6 years 2 months ago
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