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BDO INSTITUTE FOR NONPROFIT EXCELLENCE
WHO’S WATCHING YOU NOW?
Review of State & Other Fundraising Reporting in an Ever Changing
Regulatory Environment
June 13, 2013
Presented By: Seth Perlman
Tracy L. Boak
Perlman & Perlman, LLP
41 Madison Avenue, Suite 4000
New York, NY 10010
212-889-0575
www.PerlmanandPerlman.com
WHO’S WATCHING YOU?
IRS Other Federal
Agencies
Watchdog Organizations News
Media
Legislature
States
Donors
THRESHOLD QUESTIONS
Why is fundraising regulated?
What role do the states play?
What role does the federal government play?
What about watchdogs and the media?
How extensive is fraudulent fundraising in the charitable sector?
Does registration and reporting help prevent fraud?
How has technology changed the landscape?
How will it change in the future?
TOPICS TO BE COVERED…
History of Fundraising What Activities are Regulated Role of Government Constitutional Framework Evolution of Fundraising
HISTORY OF FUNDRAISING REGULATION
In 1955, New York established the Office of Charitable Registration to administer new fund raising regulations.
Eventually over 40 other states established charity
offices modeled after New York, in response to: Growth of mass marketing technology Proliferation of charities Increased competition Increased presence and use of commercial fundraisers
PROLIFERATION OF CHARITIES
501(c)(3) Entities Registered with IRS __________________________________
1940: 12,500 1980: 320,000 1996: 654,186 2009: 1,135,626
_________________________________
As of 12/2012, 1,072,746 (973, 961 public charities and 98,785 private foundations)
WHAT ACTIVITY IS REGULATED?
SOLICITATION In short, solicitation is the affirmative act of asking for a gift or selling goods or services that will benefit a charitable organization.
GOVERNANCE
Historically, governance was within the purview of the states; starting in 2008, the new Form 990 put the IRS in the position of regulating the governance of nonprofits.
FUNDRAISING FRAUD
Two primary categories: Fundraising practices that are deceptive with
respect to: What portion of the proceeds will be used in the
charity’s programs; and The extent of a charitable contribution deduction
that a supporter is entitled to Failure to comply with donor imposed
restrictions
GOVERNMENT vs. CHARITY
Conflicting interests of charities and the government results in increasing tension.
Government Interests Ensuring assets are used for charitable purposes Providing information to donors—informed giving decisions Protecting citizens from fraud Protecting donors’ privacy
Charity Interests Disseminating information Seeking funding unburdened by government
CONSTITUTIONAL FRAMEWORK
First Amendment - General Principles: Solicitation of charitable contributions is fully protected free speech,
even when conducted by professional fundraisers with profit motives
The states have the power to compel charities and their solicitors to identify themselves to the public before they solicit
However, the First Amendment otherwise protects this activity and narrow tailoring of the laws is essential
Tension between constitutional protections and states’ interests in preventing fraud has become a central issue in state regulation of charitable solicitation
CONSTITUTIONAL FRAMEWORK
The Trilogy: Schaumburg, Munson and Riley Supreme Court struck down state and local
regulations limiting the percentage of fees that charities could pay to raise funds
Pre-solicitation disclosures of fundraising percentages held unconstitutional
The Court rejected the states’ attempts to connect high fundraising costs to fraud
CONSTITUTIONAL FRAMEWORK
Illinois ex rel. Madigan v. Telemarketing Associates, Inc. Reaffirmed that charitable solicitations are
protected by First Amendment Percentage of fundraising proceeds turned over to
a charity may not alone be the basis to prove fraud
Not offering the fundraising percentage in a solicitation does not in and of itself constitute fraud
STATE REGULATION
45 states have some sort of statutory scheme to regulate charitable solicitations and the use of nonprofit assets within their borders.
Registration and reporting requirements are imposed on charities, professional fundraising counsel, professional solicitors, and commercial co-venturers.
Each group is required to file annual registrations and/or contracts and/or financial reports and/or the IRS Form 990.
CHARITABLE ORGANIZATIONS
Primarily Section 501(c)(3) and (c)(4) organizations Also may include other nonprofit organizations as
defined by state law tax exemption and deductibility is a function of federal tax
law while the nonprofit status is a creature of state law
May even include for profit organizations key issue is asking for money using a charitable appeal
40 States plus DC require registration prior to commencement of solicitations
PROFESSIONAL SOLICITORS (a/k/a Professional Fundraisers or Commercial Fundraisers)
Directly solicit the general public on behalf of a charitable organization for a fee
May have custody/control of the contributions received
Many states also require a pre-solicitation disclosure of
professional status prior to making the request for a gift
Required to register in 44 states, post a surety bond and file contracts with their nonprofit clients
PROFESSIONAL FUNDRAISING COUNSELS (a/k/a Fundraising Consultants)
Help plan, manage, advise on, consult or produce and design solicitations to the general public for a fee
Do not make the solicitations
Generally, may not have custody or control of contributions
Required to register in 32 states and post bonds in a
few
COMMERCIAL CO-VENTURERS
An entity that, as part of a sales promotion, uses the charity’s name to sell its products or services (at its usual retail price) and makes a charitable donation based on the sales
Registration and/or filing of contract required in: Alabama,
Hawaii, Maine, Massachusetts, Mississippi and South Carolina (+ maybe California)
17 other states regulate the activity but do not require
registration Require written contract and, in some cases, charity to file copy Require specific disclosure of the amount of the donation to potential
buyers (either as a dollar amount of percentage of sales)
STATE REQUIREMENTS
Annual Filings: Charities:
State-specific Registration Forms IRS Form 990s Financial Statements (may need to be compiled, reviewed or audited)
Professionals/Commercial Co-Venturers State-specific Registration Forms Contracts Campaign Financial Reports Bonds
Fees Public Filings Record Retention Requirements
REGISTRATION EXEMPTIONS
Vary from state to state, but most common include: Churches and in most states - Religious Organizations Organizations raising less than a specified dollar amount
(most common is $25,000) Educational Institutions Organizations for which solicitations limited to
membership Volunteers soliciting for the benefit of a named individual Political organizations Hospitals
SOLICITATION DISCLOSURES
Several states require specific disclosures by charities and professional solicitors Sometimes, regardless of whether registration is required Others, only if registered
Many states require professional solicitors to identify themselves as such in any oral solicitations
Written solicitations: Verbatim disclosure requirements Typically, identification of where financial information about the
charity can be found
OTHER “HOT TOPICS”
Gifts in Kind: vehicle donations; medical supplies; clothing
Joint Cost Allocation Reviews Commercial Activity/UBIT Use of (c)(4) Organizations for Political Purposes Property Tax Exemptions Application of Consumer Protection Statutes to
Charitable Solicitations
IRS
Acknowledgement of 501(c)(3) Status (Form 1023) Stricter Scrutiny
Annual Reporting (Form 990) Greater emphasis on annual requirement Revocation of 990-N filers
Role in Governance Part VI of 990
Disclosure of Information to States and from States
IRS REGULATION OF GOVERNANCE
“The IRS has a clear, unambiguous role to play in
governance … [w]here an organization has adopted good governance practices, we can reasonably expect that it poses less risk that it will misuse its tax-exempt status or its charitable assets.…”
-Sarah Hall Ingram, Commissioner,
Tax Exempt Division, 2009
OTHER GOVERNMENT REGULATORY AGENGIES
Postal Service Federal Trade Commission United States Treasury (Anti-Terrorism) U.S. Senate Finance Committee U.S. House Ways and Means Committee U.S. House Committee on Oversight and
Government Reform State Trade Commissions County and Municipal Registration Offices
WATCHDOG ORGANIZATIONS AND THE MEDIA
BBB Wise Giving Alliance
Charity Navigator
CharityWatch (f/k/a The American Institute of Philanthropy)
Guidestar - Philanthropedia
News Media
Print, Television, Internet
List of Watchdog Groups 2013
www.americanfund.info http://charitymetrics.weebly.com www.charitywatch.org www.givewell.org http://greatnonprofits.org www.myphilanthropedia.org www.standardsforexcellenceinstitute.org
And of course: www.give.org (BBB Wise Giving) www.guidestar.org www.charitynavigator.com
And some with a religious focus: www.ministrywatch.com
(part of Wall Watchers) www.ncdc.org/fundraising www.ecfa.org
EVOLUTION OF FUNDRAISING THE INTERNET
Jurisdictional questions affecting nonprofit online activities:
Whether a state court has the power to adjudicate claims against an organization for its conduct on the internet
The extent of statutory authority of state or federal regulatory agencies
Charleston Principles
Federal Tax Issues
EVOLUTION OF FUNDRAISING CAUSE-RELATED MARKETING
Definition: A commercial marketing partnership between a business and a nonprofit entity to market an image, product or service linked to a social cause or issue, for mutual benefit.
Many state regulations to protect against potential consumer fraud or deception and to ensure that the funds raised are used for the charitable purposes as advertised.
New York Attorney General Best Practices
EVOLUTION OF FUNDRAISING OTHER METHODS
Mobile Giving Social Media Other Web-based Transaction Tools:
Auctions Event Templates Virtual Thrift Stores Virtual Shopping Malls Fundraising Software “Networking” Sites for Charities and Grant Makers Peer to Peer Sites Digital “direct mailing” through email and sms messaging