Fundraising activities are now on the IRS’s radar screen. The Service issued an Audit Technique Guide on what they look for in audits of fundraising activities.
Summary of the Presentation:
For context, the presenter gave an overview of how changes in income tax incentives could affect charitable giving, and how organizations are responding. She then provided takeaways from the recently issued IRS Audit Technique Guide, which outlines what the IRS looks for when it examines fundraising activities. She covered challenges related to cash and in-kind contributions, events, auctions, anonymous gifts, and gift acknowledgments. Lastly, she reviewed common red flags and pitfalls when reporting fundraising activities on the 990 and its schedules.
IRS Audit Technique Guide on Fundraising
The presenter suggested that nonprofit managers refer to the Audit Technique Guide (ATG) as a risk management tool when setting policy and putting procedures in place. A PDF of the guide is available from the IRS website: Audit Technique Guide – Fundraising Activities
Context: Fundraising Activity Increases in Response to New Tax Law
The presenter briefly summarized the ways in which tax incentives for charitable giving have changed:
- Increase in the standard deduction for filers
- Estimated that proportion choosing the standard deduction will increase from 70% to 94% of filers
- Those filers no longer itemizing will have a reduced incentive to make charitable donations
- Reduction of top marginal rate – another disincentive for charitable giving
- Increase in charitable deduction limit to 60% of Adjusted Gross Income – an incentive for giving, applies to a subset of tax filers
- The Pease limit on itemized deductions will be phased out – another incentive for giving, though only in very limited scenarios
- Elimination of the 80% deduction for payments for the right to college sports tickets
- Increase in estate and gift tax exclusions means less incentive for charitable bequests
The predictions of the effect of these changes on charitable donations have been dire, ranging from a $13B to $20B per year reduction in giving. While the new law reduces charitable giving incentives for low- and moderate-income tax filers, in some cases it increases them for high-income filers. The presenter noted increased effort, on the part of charitable organizations, to cultivate high-income donors. Overall, fundraising activity is predicted to increase. Against this background, tax reporting and compliance will become more important.
One of the trends the presenter expected to continue was the tendency to bunch contributions in a single tax year, in order to maximize the tax deduction. One of the ways donors accomplish this is by making larger contributions to donor advised funds during certain years.
Tax Reporting Challenges and Avoiding Pitfalls
The presenter described common challenges and pitfalls.
- Cash contributions: For contributions of $250 or more, contemporaneous written acknowledgment is required for those donors who plan to make tax deductions for charitable giving. She gave an example of acceptable language for acknowledgments.
- In-kind contributions
- No deduction allowed for donated services, or for the use of facilities
- For noncash contributions valued from $500 to $5,000, an acknowledgment is needed in order to claim a deduction
- For in-kind donations of more than $5,000 in value, the donor must both have an acknowledgment from the charity and file a Form 8283 in order to deduct the value. For anything other than publicly-traded securities, a qualified, independent appraisal of the donated goods is also required. Securing and paying for the appraisal is a responsiblity of the donor, not the receiving charity. Similarly, the gift acknowledgment should describe what the charity received, but not assign a dollar value to it
- Fundraising events
- Common misconception: The fair market value of goods or services provided to the donor can be based on the cost to the organization. In fact, the IRS requires an estimate of the value based on a market equivalent. For example, if the venue and food for an event were donated to the charity, this would not reduce the quid pro quo value subtracted from a charitable gift.
- The charity is still required to report the quid pro quo value against the donation, even when a donor does not show up to the event.
- Raffles
- The cost of raffle tickets are not tax deductible to the purchaser
- Items donated to be raffled off are deductible, except for time (such as services) and use of facilities (such as a vacation home)
- In Massachusetts, before holding a raffle, an organization needs a permit from the local jurisdiction
- Auctions
- In-kind donations of items to be auctioned off are deductible to the donor — again, excluding donated time and use of facilities
- If the value is greater than $5,000, the donor needs to have the charity sign a Form 8283. Assuming the item valued at $5,000 or more is sold at the auction, the charity needs to file Form 8282 with the IRS, and provide a copy to the donor
- Payments on winning bids are deductible only for the amount above the value of the item won. If the bid is the fair market value or less, no deduction is allowed
- Sponsorships
- Corporate sponsorship is usually a charitable contribution, unless the organization provides advertising in return. In that case, it may trigger UBIT for the charity
- But many things do not count as advertising, including the use of the donor’s name, logo, and list of products in materials. There are specific rules about the type of sponsor information will not be considered paid advertising.
- Anonymous gifts
- If the donor is taking a charitable deduction, they need a receipt acknowledging their donation
- It is fine for the organization to withhold the identity of the donor from the public and from people within the organization, but if the donation is over the threshold for Schedule B reporting, the charity must disclose the donor’s name to the IRS
- Receipts
- Quid pro quo
- Donations of more than $75 are deductible only in the amount exceeding the FMV of what the donor received or was entitled to. It is the organization’s responsibility to disclose that value to the donor, as part of the solicitation and acknowledgment
- State registrations
- States have their own rules concerning registration and reporting. In some states, these rules may be triggered simply by having a “donate” button on a website accessible in that state
- Parts of the state registration and reporting may be delegated to outside services, such as Labyrinth (http://www.labyrinthinc.com)
Form 990 Reporting
- Though there may be legitimate reasons for fluctuations in the ratio of fundraising expense to contributions, a high ratio may trigger IRS attention
- Be mindful of consistency between the disclosure checklist and the financial reports and schedules
- See questions about required filings and communication. Note that responses to other questions — e.g., about event-related income and expense or in-kind donations received — may trigger additional attention to your responses.
- 7b, whether the organization notified donors of the value of goods and services received for payments over $75
- 7c, whether the organization filed Form 8282 for in-kind donations sold
- Pay attention to reporting of event income and expense, and be prepared to justify the appearance of low or negative net income. Expect your Schedule G, Part II report to come under close review
- Is the reporting of professional fundraising services consistent with activities reported?
- A common error is checking the wrong box in the Schedule B list of contributors. Are in-kind donations checked as “noncash”?
The IRS and your organization
Links to specific guides published by the IRS (Overview: Audit Technique Guides (ATGs) for Exempt Organizations)
Based on the ATGs, expect IRS attention in these areas:
- Professional fundraisers
- Fundraising events
- Substantiation rules
- Quid pro quo contributions
- Non-cash contributions
- Penalty considerations
Contact from the IRS can take multiple forms short of an audit, ranging from informational letters to compliance checks.
The presenter predicted these activities or features will become red flags for the IRS:
- Fundraising events
- In-kind donations
- Donations of art or historical treasures
- Anonymous donors
Resources from the meeting:
IRS Notice 2017-73 – DAF – IRS requests comments Audit Technique Guide for Fundraising Activities NPFM Fundraising Slide Deck
Audit Technique Guide for Fundraising Activities
IRS Notice 2017-73 – DAF – IRS requests comments
Laura J. Kenney is a tax principal in BlumShapiro’s non-profit group and enjoys providing tax services to many types of non-profit clients throughout New England for over 25 years. BlumShapiro is the largest regional accounting, tax and consulting firm in New England, with over 450 people. Our non-profit service group understands the unique needs of non-profit clients.