Contributions matter: A primer on best practices for NFPs (part 2)
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Contributions matter: A primer on best practices for NFPs (part 2)

9 months ago · 3 min read

Contribution revenue is the lifeblood of most not-for-profits, yet many are unaware of the related regulatory requirements.

While not-for-profits (NFPs) actively solicit donations, doing so without fully understanding the associated laws and regulations can be detrimental. This multi-part article series covers the following important topics:

  • Providing donors with gift acknowledgement letters that comply with substantiation requirements for charitable contributions (part 1)

  • Tax Court cases regarding insufficient written acknowledgements and recommended best practices (part 2)

  • Complying with laws and regulations for fundraising and soliciting donor contributions (part 3)

  • Establishing donor privacy and gift acceptance policies (part 4)

When NFPs are proactive in preparing gift acknowledgements, they help to ensure that their donors’ gifts will be tax deductible. In this part, we highlight three Tax Court cases that stress the importance of gift acknowledgements and cover seven best practices for NFPs.

Villareale v. Commissioner, T. C. Memo 2013-74

In this case, the taxpayer, who was President of an NFP, claimed deductions for several contributions of more than $250 each made by electronic transfer from her personal bank account to the charity's account. The charity did not provide any written acknowledgment of the contributions to the taxpayer. The deduction was denied because the contributions were not properly substantiated.

Recall that donors cannot claim a tax deduction for any single contribution of $250 or more without a contemporaneous written acknowledgement from the recipient organization.

Durden v. Commissioner, T.C. Memo. 2012-140

In this case, the taxpayer claimed deductions for charitable contributions made by check that were more than $250 each. The taxpayer received two acknowledgements. The first failed to include a statement that no goods or services were received, and the second revised letter was not contemporaneous. The deduction was denied because the contributions were not properly substantiated.

Remember, the IRS substantiation requirements for deductible contributions include a statement that no goods or services were provided to the donor in return for the contribution if that is the case. Also recall that IRS Publication 1771 defines contemporaneous as a written acknowledgement of a donor’s contribution that is received by the earlier of the filing date or the due date (including extensions) of the individual tax return reporting the charitable contribution deduction.

Garcia v. Commissioner, T.C. Memo. 2016-21

In this case, the taxpayer (a husband and wife) made a series of cash and non-cash charitable contributions during the tax year. Deductions of about $5,300 were denied because the taxpayer could not demonstrate the recipient charity was a valid Section 501(c)(3) organization entitled to receive tax-deductible contributions. Recall that not all tax-exempt entities organized under section 501(c) are 501(c)(3) public charities. For example, civic leagues, social clubs, and fraternal societies, organized under other 501(c)(4), (7), and (8), respectively, are not eligible to receive tax-deductible contributions. (Note: This result could also occur with a 501(c)(3) organization that lost its tax-exempt status due to failure to file Form 990 for three consecutive years or didn’t apply for an exemption.)

Recommended best practices for NFPs

NFPs can help to ensure that their contributors can meet the charitable contribution deduction substantiation requirements by following these best practices:

  • Send written acknowledgements to donors soon after receipt of each gift, but no later than January 31 following the end of the preceding tax year. An annual written acknowledgement summarizing all gifts is optional.

  • The IRS has not specified any particular format or means of communication for gift acknowledgements. If email is used, recipients should be encouraged to print and maintain written acknowledgement with their hard-copy tax documentation or save them with their digital tax records.

  • Some donors may intentionally make multiple, smaller gifts to avoid the substantiation requirements. For this reason, NFPs should consider sending written acknowledgements for all gifts. Automating the process and using four templates (cash and non-cash donations with and without the goods and services statement) goes a long way toward ensuring compliance and building trust with donors.

  • Gifts from donor advised funds require special treatment. This is a case when a “thank you” letter will suffice. Donors have already received a written tax acknowledgment from the fund sponsor for their tax-deductible contribution to the donor advised fund and are not entitled to an additional tax deduction.

  • Some charitable organizations may house both tax-exempt and non-tax-exempt entities. As a best practice that will help donors comply with charitable deduction requirements, organizations would send separate acknowledgements for tax-exempt and non-tax-exempt gifts.

  • To avoid a conflict of interest, NFPs would not undertake appraisals and valuations, except for marketable securities. If a donor asks for a referral to an appraiser or valuation specialist, it is best to make three or more recommendations without any kind of endorsement. Furthermore, organizations would not want to offer donors any reimbursement or payment of the fee for the appraisal.

  • Internal audit, if the function exists, or one or more board members would review the written acknowledgements workflow as another best practice. Financial statement auditors might also review the NFP’s gift acceptance policy and gift acknowledgement procedures in connection with their evaluation of internal controls.

Gift acknowledgements are one of many compliance issues for fundraising organizations. In part 3 of this series, we will look at charitable solicitation requirements.

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